How to Calculate Franking Credit

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A dividend imputation system attributes some or all corporate taxes to shareholders in the form of a franking credit, which reduces income tax payable on the dividend distributions. A franking credit eliminates double taxation. Instead of paying tax at the corporate level and on dividends, a shareholder only pays taxes at his marginal tax rate. Australia and New Zealand are examples of countries with dividend imputation systems.

  • Calculate the company's tax rate from its income statement. Divide the company's taxes by its pre-tax income. Most companies disclose the tax rate as well. For example, if the company pays $1,184 million in taxes on pre-tax profit of $3,947 million, its corporate tax rate is 30 percent.

  • Determine the company's franking proportion of dividends by examining the notes of its annual report. A franking portion of 100 percent, or 1, means shareholders receive a full franking credit equal to the corporate tax rate.

  • Plug in the numbers to the franking credit formula: Div x tc /(1-tc) x fp. Where:

    Div = dividend

    tc= corporate tax rate

    fp= franking proportion

    On dividends of $1,000, a tax rate of 30 percent and franking portion of 1, the franking credit is $429 ($1,000 x 0.30) / (1-0.30) x 1.

Tips & Warnings

  • The franking credit essentially reduces your dividend tax liability by the franking portion. Thus, if a company's franking portion is 1 on a corporate tax rate of 30 percent, your dividend tax rate is reduced by 30 percent. Because of the franking credit, a person in the 40 percent tax bracket only pays 10 percent tax on his dividend distribution.

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