A tax benefits of using a company as a business structure is Franking Credits. How do they work?
When a company makes a profit, it pays tax at 27.5% (small companies tax rate). Company tax paid is recorded in the company’s “Franking” account. When shareholders receive a dividend to , franking credits are attached.
The amount received is the “after tax” amount. For example, Wage is $1000 and tax withheld is $275. The amount received is $725 after tax. Income included in the busienss owner’s tax return is $1000, with $275 recorded as tax already paid.
Dividends work in the same way, If a business owner receives a dividend of $725, then $275 of franking credits are attached. Income included in your tax return is $1000 and $275 is recorded as tax already paid.
A business owner receiving income from their company can receive it either as a “wage” or “dividend”. If received as a WAGE, the company pays tax at 27.5% plus tax is paid on the directors wages, resulting in double tax. If received as a DIVIDEND, tax is already paid to the value of 27.5%. Tax is paid once only.
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