# Paying franked dividends from your own company



## bellenuit (19 March 2010)

My accountant is away for another 2 weeks, so I am hoping someone else may be able to answer this.

I have my own private company that I use for share trading of which I am the sole director/shareholder.

I want to pay a dividend to myself next week from this company. I'm not fully au fait with how the franking account works, but it has about $2k in franking credits and I want to make a dividend payment of about $20K. By year end the company will have a lot more franking credits available, certainly enough to pay a fully franked $20K dividend.

Am I able to make next week's dividend payment fully franked, even though there isn't currently enough franking credits to do so, knowing that there will be by year end.


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## 1q2w3e4r (20 March 2010)

No.

You can only use the franking credits available in the company's "franking account"


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## gooner (20 March 2010)

bellenuit said:


> My accountant is away for another 2 weeks, so I am hoping someone else may be able to answer this.
> 
> I have my own private company that I use for share trading of which I am the sole director/shareholder.
> 
> ...




bellenuit

You can fully frank the current dividend even if you do not have enough franking credits right now as long as you expect to have enough by the end of the franking period.  Details in link below.  I'm not a tax person - but at work, I used to sit next to a really good one (in fact the whole department) so picked up tax by osmosis

http://www.ato.gov.au/print.asp?doc=/content/24066.htm


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## bellenuit (20 March 2010)

gooner said:


> You can fully frank the current dividend even if you do not have enough franking credits right now as long as you expect to have enough by the end of the franking period.  Details in link below.  I'm not a tax person - but at work, I used to sit next to a really good one (in fact the whole department) so picked up tax by osmosis
> 
> http://www.ato.gov.au/print.asp?doc=/content/24066.htm




Thanks. That's an excellent link.


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## Tysonboss1 (22 March 2010)

Just pay it to yourself and mark it with a generic code and then when your acccount does the tax return he will work out the best way to report it whether that be dividends, wages etc.


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## Taltan (22 March 2010)

The link is correct, just keep in mind that franking credits are only earned by paying tax, not by accruing a tax liability. 

So the credits available by year end need to be via tax payment not just profit accrued on which tax will be due in 2011. 

Hope that helps. Of course if you need a new accountant pm me


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## bellenuit (22 March 2010)

Taltan said:


> The link is correct, just keep in mind that franking credits are only earned by paying tax, not by accruing a tax liability.
> 
> So the credits available by year end need to be via tax payment not just profit accrued on which tax will be due in 2011.




That's an interesting point and I will need to take in mind. Most of the credits would be just accrued.

I've worked out that the way to handle this immediate payment is to use it to pay off the loan that the company owes me (the balance of the money I put in to fund the company) which is now down to just under $20K.  I have enough credits to treat the excess paid as a fully franked dividend.

However, to add a complication. I want to actually close the company before year end. How would I handle transferring the net asset balance to my name? Do I pay the tax at closure even if before June 30th and then pay a franked dividend of what's left over? 

I'm hoping to have everything settled by June 30th, so that I don't need to file anything or pay the accountant for services related to the 2010/2011 tax year.


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## Taltan (22 March 2010)

Firstly pay yourself any loans/dividends. Then shut the company down pre 30 June i.e. close bank accounts, any assets, deregister etc. 
Than post 30 June you lodge a final tax return stating that the company ceased during the 2010 financial year. Thus nothing required for 2010/11.


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## bellenuit (22 March 2010)

Taltan said:


> Firstly pay yourself any loans/dividends. Then shut the company down pre 30 June i.e. close bank accounts, any assets, deregister etc.
> Than post 30 June you lodge a final tax return stating that the company ceased during the 2010 financial year. Thus nothing required for 2010/11.




Taltan. But how would I get around the accrued franking credits not being usable issue you raised in your previous post, if I don't pay the tax until post June 30th? 

As of today I have now paid off the company loan owed to me and also paid a fully franked dividend for the excess that the $20K was over the loan balance. So to make things simple, let's say I have zero franking credits in the franking account. Let's also say that I plan to sell all the shares held by the company on April 30th and cease operating and this results in a profit of $100K for the year of which $30K or thereabouts will be owed to the tax man but not to be paid until post June 30.

Can the $70K net balance be paid to me as a fully franked dividend this year?


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## Taltan (23 March 2010)

I'd say either rollover the company and pay the dividend in 2010/11 or do it all in 2009/10 and liquidate the company thereafter. 

Sorry to then go to caveats but without knowing your situation I cannot recommend further except to say this is a common problem that not many think about (or are always advised about) when they incorporate a company to get the flat 30% tax rate.


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## 1q2w3e4r (23 March 2010)

bellenuit said:


> Taltan. But how would I get around the accrued franking credits not being usable issue you raised in your previous post, if I don't pay the tax until post June 30th?
> 
> As of today I have now paid off the company loan owed to me and also paid a fully franked dividend for the excess that the $20K was over the loan balance. So to make things simple, let's say I have zero franking credits in the franking account. Let's also say that I plan to sell all the shares held by the company on April 30th and cease operating and this results in a profit of $100K for the year of which $30K or thereabouts will be owed to the tax man but not to be paid until post June 30.
> 
> Can the $70K net balance be paid to me as a fully franked dividend this year?




As I understand it, you can only declare fully franked dividends on tax paid.

So, in simple terms unless you've paid $70k in tax then no, you can't declare $70k as a FFD.

You could take a $30k fully franked dividend as you would have $30k of franking credits in the franking account and take the rest out as unfranked dividends.

You really need to speak with your accountant, or a accountant to suss out your exact situation.


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## Whiskers (23 March 2010)

gooner said:


> bellenuit
> 
> *You can fully frank the current dividend even if you do not have enough franking credits right now as long as you expect to have enough by the end of the franking period. * Details in link below.  I'm not a tax person - but at work, I used to sit next to a really good one (in fact the whole department) so picked up tax by osmosis
> 
> http://www.ato.gov.au/print.asp?doc=/content/24066.htm




I don't think that's quite right. I agree with 1q2w3e4r.

You can only frank dividends on tax paid, ie currently you can only frank to the extent of your 09 tax return franking account. 

You can frank to anticipated franking credits for the current year, but only after the end of the accounting period, June 30 2010, ie after you have calculated your tax liability and waiting for your tax return to be lodged/accepted.


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## Prospector (23 March 2010)

Whiskers said:


> I don't think that's quite right. I agree with 1q2w3e4r.
> 
> You can only frank dividends on tax paid, ie currently you can only frank to the extent of your 09 tax return franking account.
> 
> You can frank to anticipated franking credits for the current year, but only after the end of the accounting period, June 30 2010, ie after you have calculated your tax liability and waiting for your tax return to be lodged/accepted.




Yep, thats my understanding too - from past tax paid.


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## gooner (23 March 2010)

Whiskers said:


> I don't think that's quite right. I agree with 1q2w3e4r.
> 
> You can only frank dividends on tax paid, ie currently you can only frank to the extent of your 09 tax return franking account.
> 
> You can frank to anticipated franking credits for the current year, but only after the end of the accounting period, June 30 2010, ie after you have calculated your tax liability and waiting for your tax return to be lodged/accepted.






Prospector said:


> Yep, thats my understanding too - from past tax paid.




You are both wrong. I even posted the link  that explains you have to the end of the franking period to ensure you have paid enough tax to cover the franking.


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## Whiskers (23 March 2010)

gooner said:


> You are both wrong. I even posted the link  that explains you have to the end of the franking period to ensure you have paid enough tax to cover the franking.




I read the link and it didn't contradict anything I already believed.

Maybe you can cut and highlight the bit you rely on.


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## gooner (23 March 2010)

Whiskers said:


> I read the link and it didn't contradict anything I already believed.
> 
> Maybe you can cut and highlight the bit you rely on.




Below is direct from the link

Example 2: Franking a distribution
On 1 August 2002, Adam Industries Ltd wants to distribute $700 of profits to its shareholders. The distribution will be the first distribution made by Adam Industries Ltd in the period. At the time of making this distribution Adam Industries Ltd’s franking account balance will be nil. However, it expects to have a surplus balance of $300 after paying its income tax liability, which is due in October 2002.
Consequently, in making a decision on the extent to which it should frank the distribution to be made on 1 August 2002, Adam Industries Ltd may take into account the anticipated franking account surplus of $300.


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## Whiskers (23 March 2010)

gooner said:


> Below is direct from the link
> 
> Example 2: Franking a distribution
> *On 1 August 2002*, Adam Industries Ltd wants to distribute $700 of profits to its shareholders. The distribution will be the first distribution made by Adam Industries Ltd in the period. At the time of making this distribution Adam Industries Ltd’s franking account balance will be nil. *However, it expects to have a surplus balance of $300 after paying its income tax liability, which is due in October 2002.*Consequently, in making a decision on the extent to which it should frank the distribution to be made on 1 August 2002, Adam Industries Ltd may take into account the anticipated franking account surplus of $300.




That's exactly as I explained. 

In bellenuit's case he/she wants to know how much franking credit is available now, ie before the end of financial year, June 30. 

Note the example specifies 1 Aug, the first day of the next financial year but before the tax return has been lodged/accepted by the ATO and the franking credit is formally credited to the franking acount. The franking credit relates to the income tax year ended 30th June 2002... not the 2003 income tax year in which the distrubition is made.


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## 1q2w3e4r (23 March 2010)

gooner said:


> You are both wrong. I even posted the link  that explains you have to the end of the franking period to ensure you have paid enough tax to cover the franking.




I'm happy to be wrong, as I posted above is how I understand it.  You can't take a dividend if you don't have the franking credits in the franking account which are dollar for dollar on tax paid from past profits.  

I've taken 85% of my income from the last two years out of fully franked dividends.

I'd still speak with an accountant, its not something I'd go ahead and do and end up with a nasty suprise.


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## Whiskers (23 March 2010)

I understand where you're coming from gooner... 



gooner said:


> bellenuit
> 
> You can fully frank the current dividend even if you do not have enough franking credits right now *as long as you expect to have enough by the end of the franking period*.  Details in link below.  I'm not a tax person - but at work, I used to sit next to a really good one (in fact the whole department) so picked up tax by osmosis
> 
> http://www.ato.gov.au/print.asp?doc=/content/24066.htm




*But*, the problem is one could 'break a leg' in the intervening period to the end of the financial year, franking period, and end up with less tax or no tax to pay, a loss... in which case you would not have any franking credit, but a messy accounting problem to reverse the franking entry, pay back or re classify the dividend or face the wrath of the ATO.


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## bellenuit (25 March 2010)

Just one more question, if I may, to fill out my understanding of all this while awaiting my accountant's return.

Can I declare that my company ceases to carry on a business as of midnight on June 30th 2010. Then work out the tax for 2009/2010, annual return for 2009/2010, dividends to distribute net assets to me (franked to the credits available with knowledge of the tax to be paid), accountant fees etc. and pay out accordingly as soon as practicable in the new year and finally apply to deregister the company. 

Would these termination actions require an Annual Review Fee to be paid for 2010/2011 as well as having to submit a tax return (for the company) for the 2010/2011 tax year? I know deregistration can take several months to become effective.


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## Whiskers (26 March 2010)

bellenuit said:


> Just one more question, if I may, to fill out my understanding of all this while awaiting my accountant's return.
> 
> Can I declare that my company ceases to carry on a business as of midnight on June 30th 2010. Then work out the tax for 2009/2010, annual return for 2009/2010, dividends to distribute net assets to me (franked to the credits available with knowledge of the tax to be paid), accountant fees etc. and pay out accordingly as soon as practicable in the new year and finally apply to deregister the company.
> 
> Would these termination actions require an Annual Review Fee to be paid for 2010/2011 as well as having to submit a tax return (for the company) for the 2010/2011 tax year? I know deregistration can take several months to become effective.




I have not actually done this, but I think the proceedure would be, work out and clear all debts/liabilities including provision for tax, file cease to trade notice, pay tax, transfer remaining assets out of company then voluntary wind up company.

I believe you can cease to trade at any time. I expect you can pay your tax as of then rather than wait until June 30, but give the ATO a call, they will be able to advise the proceedure.

You need to fullfill ASIC requirements in conjunction with the ATO. Asic has some literature here: http://www.asic.gov.au/asic/asic.nsf/byheadline/Deregistering+a+company?openDocument


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## bellenuit (29 June 2010)

Can a PAYG Tax Instalment paid today (29/6) be used against a franked dividend paid to myself this tax year (2009/2010) even if the PAYG instalment is not due until next tax year (28 July 10)?

I have already made the payment to myself. However, part of the payment is a part payment against a loan I made to the company and part is to be a fully franked dividend. I haven't yet decided how much is to be allocated to each and want to maximise the fully franked dividend part, hence the question.

Note: The payment is all from profits.


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