Our two previous blogs touched on company tax rates and their ability to pay franked dividends to shareholders to pass on this tax.
In this blog we go into more detail about the reduced small business tax rate and how this in turn affects franking credits to shareholders.
Small Business Tax Rate
Companies that meet the turnover test and are able to be classified as a Small Business have the benefit of the reduced tax rate. For the 2017 Financial Year, the company tax rate has been reduced down to 27.5%.
However, this change will also affect the amount of Franking Credits that can be attached to Franked Dividends.
What are Franking Credits?
Companies can use franking credits, which are a type of tax credit, to pass on to shareholders tax that is paid at the company level. This offers shareholders an advantage as these franking credits can be used to offset any income tax payable on dividends or, depending on your individual income level, could potentially be received as a tax refund. Overall, franking credits eliminate the double taxation of company profits at the shareholder level, as the shareholder receives the tax paid at company level through franked dividends.
How are Franking Credits for Small Business impacted?
Previously, franked dividends could be franked at 30%. However, with the drop in the corporate tax rate to 27.5%, franked dividends can now only be franked at the lower rate of 27.5%.
This reduction of franking credits on dividends will impact companies that have current retained earnings, which would have been taxed at 30% or 28.5%. They will effectively lose the benefit of the extra taxes paid at the higher corporate tax rates.
One solution would be to allow small businesses to use differing franking rates attached to dividends that represent the actual tax paid by the company.
The lowering of the company tax rate will also impact the small business shareholders receiving franked dividends, as the reduction in franking credits attached could mean additional taxes payable by the shareholder at an individual level, depending on your individual marginal tax rate.
At the moment, any franked dividends paid from companies that are not classified as a small business or large companies, will continue to receive fully franked dividends at 30%.
Take advantage of the tax benefits available for your company and shareholders. Get in touch with BLG Business Advisers online or by calling (02) 4229 2211 today.