Tax Planning Strategy 185 | Accessing Surplus Franking Credits

This strategy is ideal for taxpayers who meet two criteria:

• They own a company with a franking account surplus (normally as the result of profits from operating a business or investments, the company paying tax and retaining those profits).
• The taxpayers (shareholders in the company) currently have nil or low taxable incomes (normally due to retirement, travelling, or receiving tax free pension income).

A franking account records the amount of tax paid that a franking entity (company or public trading trust)can pass on to its members as a franking credit. A franking credit is most commonly recorded in the account if the entity receives a franked distribution, pays income tax or a PAYG instalment. The credit is equal to the amount of tax or PAYG instalment paid, and the franking credit attached to the distribution received. A franking debit is most commonly recorded in the account when the entity pays a franked dividend to its shareholders. The debit is the amount of imputation credits on the franked dividend. The franking account is a rolling balance account which means that the balance of the account rolls over from one income year to another. The account is in surplus at a particular time if the sum of franking credits in the account exceeds the sum of franking debits.

This strategy may produce annual tax refunds of $15,000 per year for a couple. For example, if a husband and wife had nil taxable incomes (due to receiving tax free pension income), their company could annually pay them each a $17,500 dividend (with $7,500 franking credits attached). The ATO would then refund each of them over $6,300 of the franking credits each year (actually the whole $7,500 if they are entitled to the senior Tax Offset).