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How do franking credits work?

Posted on February 17, 2016 by admin

Franking credits are a kind of tax credit that allows Australian companies to pass on the tax paid at company level to shareholders.

Franking credits can reduce the income tax paid on dividends or potentially be received as a tax refund.

Where a company distributes fully franked dividends (and those dividends are included in the taxable income of the taxpayer) the taxpayer can claim a credit against their taxable income for the tax that has already been paid by the company from which the dividend was paid.

For example, an individual who owns shares in a company receives a fully franked dividend of $700 from the company. The dividend statement says that there is a franking credit of $300 (the tax the company has already paid). This means the dividend would have been $1,000 ($700 + $300) before company tax was deducted.

At the end of the financial year, the individual must declare $1,000 (the $700 dividend + the $300 franking credit) in their taxable income.

If the individual’s marginal tax rate was 15 per cent, they would have to pay $150 tax on the dividend. But because the company has already paid $300 in tax, the individual receives a refund of the difference, which is $150.

If the individual was in a higher tax bracket, they may not have been entitled to a refund of any of the franking credit, and may even have had to pay additional tax. However, if they are a low-income earner, it is possible to be refunded the full amount of the franking credit.

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Government increases cash flow support for businesses

Posted on March 27, 2020 by admin

The Australian Government has increased support for businesses to manage cash flow challenges under the ongoing COVID-19 circumstances.

The Boosting Cash Flow for Employers measure announced on 12 March 2020 will be increased to provide up to $100,000 for eligible small and medium-sized businesses. To be eligible employers must have been established prior to 12 March 2020 and have an aggregated annual turnover of less than $50 million and employ workers.

The measure will provide employers with a payment equal to 100% of the tax withheld from wages and salaries. This is a rise from the original 50%, with maximum payments being increased from $25,000 to $50,000 and minimum payments being increased from $2,000 to $10,000.

Employers will receive payments from 28 April 2020 from the ATO as automatic credit in the activity statement system upon lodging eligible upcoming activity statements.

Eligible businesses will be provided with an additional payment during July – October 2020. The payment will be equal to the total amount received under the Boosting Cash Flow for Businesses scheme. For monthly and quarterly activity statement lodgers, these payments will be provided as automatic credit in the activity statement system for each lodgement up until October 2020.

The Government has also introduced the Coronavirus SME Guarantee Scheme to support the flow of credit for small and medium enterprises (SME) by providing a guarantee of 50% to participating SME lenders for new unsecured loans that will be used for working capital. To be eligible, SMEs will have a turnover of up to $50 million and the loans must comply with the following terms:

The SME Guarantee Scheme will still require businesses to repay these loans and approval is subject to regular lending requirements. The Scheme will commence by early April 2020 and be available until 30 September 2020.

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