If you are an Australian share investor, then you have come across franking credits or, in other cases imputation credits. You have probably received franked dividends throughout your investment. However, you fail to understand what these are and how you can calculate them. Fortunately, this article is explaining the meaning of franked dividends and how they work to ensure you, as an investor understands what you are getting into. The article outlines all the tax implications franked dividends have for the shareholders, and possibly shows how to track the payouts in their portfolio.
What are Franked Dividends?
A franked dividend is a system that was hosted in Australia in 1987. Australia was among the first countries to implement the system. The sole purpose of these was to eliminate double taxation of the proceeds from an investment company.
Initially, the income made by a company from the investment was subject to taxation. When shared with the investors as payouts, they would also undergo taxation at the individual tax rate. It is common for individuals and businesses to pay tax on their income, whereby large companies have a flat rate of 30%. Since you are part owner of the company you have invested in, you are entitled to part of its profits.
Receiving payouts from the company through the profits made means you will not be taxed again. It is because the company’s earnings have already been taxed. In this case, your already taxed incomes are referred to as fully franked dividends.
Attached to these are credits which signify the total amount of tax the company has paid. Some people may call these imputation credits because they impute the tax amount owed by companies to the investors. Therefore, if someone asks what are franked dividends, be sure to direct them to this post.
How Franked Dividends Work
After knowing what these are, it is essential to understand how they work. The products are paid to an investor by the investment company if they have undergone corporate taxation in Australia. There are two ways in which the payouts work:
- Investors will get a notice containing a section titled franking credits. As mentioned, a franking credit is the amount of corporate tax the company pays.
- The investor fills their individual tax returns, including the payout and franking credit.
- The investor gets a tax credit sharing the same value as the imputation credit. The credit is often compensated against other proceeds the investor gets. Since the large companies are taxed at 30%, the individual income rate is less. This means the franked dividends go untaxed.
- Investors receive a tax refund which is the difference between their tax rate and the payout tax.
From the outline above, you learn what these are and that they provide both an income and tax rebate.
Fully and Partially Franked Dividends
Companies that issue franked dividends can choose not to pay tax on the proceeds they share with the investors. A fully franked dividend means the company has paid its tax in full and that the investors are not expected to pay any tax on it.
Partial products means the corporation has paid part of the tax on the payouts it redistributes to its shareholders. In other cases, the company fails to pay any tax. Meaning the investors receive unfranked payouts. They will have to pay part or all the tax.
Normally, partly or unfranked payouts result from the company failing to make a profit in the financial year. It means it will have to carry forward the previous losses, thus reducing its tax rate.
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