Why the Government doesn’t want you to understand how franking credits work.

It’s not an accident that understanding how it all works is boring.

The thing is, understanding how franking credits can work as a tax loophole is boring on purpose.

It’s important to some people that you think tax policy is boring because then you’ll ignore it. And it is because the public ignore tax loopholes that tax avoiders are able to arrange their tax affairs to minimise the tax they pay.

So. What are Franking Credits?

When a company makes a profit it pays company tax on the amount of profit it has made.

Some profit is divided up and paid to shareholders as ‘dividends’. These dividends are income for those shareholders, which would be taxed again via the income tax.

To avoid this double taxation, the tax office allows companies who have paid company tax on their profit to pay ‘franked dividends’ with an attached ‘franking credit’.

A franked credit is like a flag that signals to the tax office that company tax has already been paid on the profits which the dividend comes from.

So when shareholders do their income taxes, they receive a credit for the tax already paid on the dividend part of their income.

Wow. Australia’s really generous when it comes to shareholders.

But Australia goes further and provides a cash refund on any unused franking credits.

We are the only country that refunds unused franking credits.

What does ‘refunding unused franking credits‘ even mean?

When that happens, what Australia does that nobody else does, is if you are a shareholder and have any unused franking credits, then the tax office pays out the value of the extra franking credits to you— they are refunded in cash.

It’s like if you could cash in unused discount vouchers.

Of all the OECD nations only Australia is this generous to shareholders.

Why should we care?

And the thing is, it is mostly wealthy people who get these franking credits and so are in a position to be in this situation.

Australia Institute research shows franking credits to households (not including those earned in superannuation funds and trusts) are worth almost $10 billion per year. They flow overwhelmingly to high income earning households as shown below:

If it’s all so boring, why is it in the news all of a sudden?

As we said earlier, Australia is the only country which is this generous with refunding unused franking credits.

But what do self funded retirees have to do with all this?

Their super fund pays no tax on its income regardless of how much income they receive and so the tax office pays cash for the excess franked credits.

But the thing is, when you look at the distribution of franked credits by wealth, and by age bracket, not only are the majority of franked credits not even given to retirees, the overwhelming majority of recipients are in high to very high income brackets — people with incomes so high they hardly need a cash handout from the tax office.

Table 1— Very high income earners proportion of franking credits

Source: ATO Tax Statistics

Table 2 — Age distribution of franking credits

Source: STINMOD 2014–15 Financial Year Estimate

The NATSEM modelling shows that franking credit distribution increases with age, but peaks at those in their 50s.

The drop-off after that age most likely relates to people moving into retirement and primarily earning an income from their superannuation funds rather than dividend income.

In fact, if financial support for the elderly was the Government’s goal, there are numerous better and more equitable ways to assist those who are in most need.

From all of the team at The Australia Institute, thanks for reading.
We are able to do what we do because of your

Subscribe to our mailing list to receive updates like this, straight to your inbox.

an independent think-tank based in Canberra > australia.org.au

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store