Australian dividend imputation and recording franking credits

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h

15 Sep, 2017 08:20 AM

In the Public Discussions area, there is a now-closed discussion of one method of dealing with dividend imputation [Australia dividend and imputation credit posting]. A suggested method was posted by dwg.

I recently started using Moneydance for my personal accounts, after using Quicken then Reckon Personal for 25 years. I'd like to suggest another means of recording imputation credits. It follows the spirit of the Australian imputation system, which is that the franking credit is just that, a credit, and is an asset belonging to the recipient.

In Australia, if a share owner receives a fully franked dividend of $100.00, then the associated franking credit is (as at Sep 2017) $42.86 ($100/0.7 * 0.3). Both the $100 cash and the franking credit of $42.86 belong to the recipient, and are income generated by the share. Both will be declared as part of the recipient's taxable income for the year. If the recipient's total income tax payable at the end of the year is less than the total of all of the recipient's franking credits accumulated during the year, the Australian Tax Office will pay the remaining franking credit amount to the recipient.

With that as background, here is how I am handling franked dividends in Moneydance.

I have created two "bank" accounts: Franking Credits FY17 and Franking Credits FY18. Because I started using Moneydance as from 1 July 2017, the Franking Credits FY17 account has an opening balance of the franking credits I have received up to 30 June 2017, recorded in detail elsewhere. The opening balance for Franking Credits FY18 is zero.

When I receive a franked dividend in the new tax year FY18, I create two separate journals within the portfolio's investment account : A: DivXfr for the dividend cash received, transferred to a normal bank account, and B: DivXfr for the franking credit amount, transferred to the Franking Credits FY18 account. Both A and B increase the recipient's networth, correctly reflecting the Australian situation.

Sometime later in 2017, my FY17 tax return will be finalised. Let's assume I get a bill that states my total income tax bill for FY17 is $5,000, and I have received $3,000 franking credits during FY17. The tax office will know I have $3,000 of franking credits for FY17, and will ask me to remit the balance of $2,000. In Moneydance, I will post a payment in the Franking credits FY17 account of $3,000, booked to the category Personal Income Tax. The Franking credits FY17 account balance will then be zero, and the account can be marked Inactive. Separately, I will make a $2,000 cash payment from a normal bank account to the tax office, again booking the payment to the category Personal Income Tax.

For the rest of FY18, I will have just one Franking Credits FY18 "bank" account in action. But as soon as FY19 starts in July 2018, I will have to create a new "bank" account Franking Credits FY19, and the cycle repeats.

The benefit of using the method described above is that each franking credit is highly visible as a transaction, and correctly adds to the recipient's networth. By treating the franking credit as a dividend, the true income return from the share is accurately reported, because both the cash received and the franking credit as recorded as income.

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