The Small Business Owner’s Guide to Company Tax and Franking Credits

Most business owners understandably want to minimise tax. So when a company pays 25% corporate tax, it can feel like a hit to your bottom line.

But in Australia, company tax isn’t the end of the story — it’s often just a temporary withholding.

Thanks to our franking credit system, that tax becomes a benefit when profits are distributed to shareholders. Here’s how it works — and why companies can be powerful tax planning tools.

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📜 What Are Franking Credits?

Franking credits (also known as imputation credits) represent tax already paid by a company on its profits. When the company pays a dividend, it can “attach” those credits to pass the benefit on to shareholders.

This system prevents the same income from being taxed twice — once in the company, and again in the shareholder’s hands. Instead, tax is only paid once — at the shareholder’s marginal tax rate — with a credit for the tax already paid.

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🏦 Why Companies Are Great Tax Planning Tools

When profits are retained in a company, they are taxed at the corporate rate (currently 25% for base rate entities). This creates a tax deferral opportunity for business owners.

You only pay top-up tax when those profits are extracted as dividends. That means:
• You can cap tax at 25% indefinitely by leaving profits in the company
• You have flexibility over when and how profits are distributed
• You can time dividends in years where your personal tax rate is lower
• You can spread dividends across multiple shareholders or family members
• You may use retained profits to reinvest, pay down debt, or grow the business — without triggering further tax

In essence, a company becomes a tax-effective shelter for business profits — offering long-term planning flexibility.

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💰 How It Works – Franking Credit Examples (FY26 incl. Medicare Levy)

Let’s say your company earns $100 in profit and pays 25% corporate tax. That’s $25 paid to the ATO, leaving $75 available to distribute as a fully franked dividend.

When that $75 is paid to you with a $25 franking credit, you declare $100 in assessable income on your personal tax return.

Here’s how this plays out at common marginal tax rates for FY26 (including the 2% Medicare Levy):

💡 Think of It as a Temporary Withholding, Not a Sunk Cost

The company’s 25% tax isn’t a permanent cost — it’s a prepaid portion of your personal tax.

When dividends are paid, those franking credits pass through to you. You only ever pay the difference between your marginal rate and the company’s 25% — or you may receive a refund if your rate is lower.

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🎯 Why This Matters

Franking credits are one of the most powerful — and underappreciated — features of Australia’s tax system. They ensure profits are only taxed once, in the hands of the shareholder who ultimately receives them.

And when used strategically, companies give business owners long-term flexibility to manage how and when tax is paid — making them ideal vehicles for profit retention, reinvestment, and future distribution.

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✅Final Thoughts

Company tax isn’t necessarily a cost — it’s often just a timing difference.

If you’re a business owner, understanding how company tax and franking credits work can help you extract profits more efficiently and plan smarter for your future.

Need help reviewing your dividend strategy or structuring your company to maximise tax outcomes? Get in touch with the team at LINK — we’re here to help you make the most of it.

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