FRANKING ACCOUNTS – IMPACT OF COMPANY TAX RATE CUTS

Under the Australian imputation system, when a company distributes its profit to its shareholders, the company can pass to the shareholders credits for income tax paid by the company on its profits.  Simply, Franked dividends are distributions to shareholders with franking credits.

On 19 May 2017, the Bill to reduce the corporate tax rate from 30% to 27.50% became Law.

The Legislation for reduction in the corporate tax rate for some small or medium sized businesses could be a pyrrhic victory as it will leave the shareholders with a reduced franking credit.

Essentially, the change in tax rate will represent a higher cost to shareholders who will see a reduction to the franking credits they can claim, which perhaps defeats the purpose of the company tax reduction.

If you would like to discuss this further, please contact our office.