For many business owners, navigating the intricacies of taxation can seem daunting, especially when involving complex structures like operating entities, investment holding companies, and self-managed superannuation funds (SMSFs). One significant aspect worth understanding is franking credits – particularly powerful when you have a partner not actively employed or working in your business.
Franking credits, also known as imputation credits, are a way to avoid double taxation on company profits. When your business generates profit, it pays company tax (usually at the corporate tax rate, e.g., 25% or 30%). If these profits are then paid as dividends to shareholders, these dividends can include franking credits equivalent to the tax already paid by the company. Shareholders can then use these credits to reduce their personal tax liability.
It’s a generalisation but we often see in construction a business owner who has a partner that is not working in your business or where their personal income may be low or even nil. This creates a valuable opportunity. By distributing franked dividends to your non-working partner, they can often utilise these franking credits more effectively, potentially resulting in a cash refund from the Australian Taxation Office (ATO).
This occurs because franking credits are refundable. If the total franking credits exceed the tax owed by an individual, the ATO provides a refund for the difference.
Many business owners operate through multiple entities. Typically, your operating entity earns income and pays company tax. Profits can be paid to an investment or holding company, usually structured to manage risks, increase asset protection, or provide additional investment opportunities.
The holding company can then pay franked dividends to individual shareholders, including your non-working partner, who can maximise the benefit by claiming franking credits against their lower (or zero) taxable income.
While franking credits offer significant advantages, compliance is crucial:
Franking credits offer a powerful mechanism to minimise tax liabilities, especially within complex business and investment structures. By understanding and strategically leveraging these credits, particularly through thoughtful distribution to non-working partners, business owners can significantly enhance financial outcomes and overall wealth management.
As always, personalised advice tailored to your specific circumstances from your accountant or financial adviser is recommended to maximise these opportunities effectively.
