What is a Franked Dividend?
A franked dividend refers to a type of dividend payment made by corporations in certain countries, including Australia. It is a tax-effective way for companies to distribute profits to their shareholders by passing on the tax paid at the corporate level. Essentially, franking credits are attached to these dividends which represent the taxes paid by the corporation on its profits. This system is intended to prevent double taxation, ensuring that shareholders are not taxed twice on the same income.
When a company makes a profit, it must pay corporate taxes on that income. Once these taxes are paid, the remaining profits can be distributed to shareholders as dividends. In the case of franked dividends, the company attaches a franking credit to the dividend payment. These credits represent the tax already paid by the corporation on the profits, at the applicable tax rate.
When shareholders receive a franked dividend, they are also entitled to the attached franking credit. The purpose is to allow individual shareholders to offset their own tax obligations with the corporate taxes paid by the company, keeping individual investors on an equal footing with companies that receive tax deductions.
To understand the benefits of a franked dividend, let’s consider an example. Suppose a corporation earns a profit of $10,000 on which it pays corporate taxes at a rate of 30%. After paying $3,000 in taxes, the company can distribute the remaining $7,000 as a dividend. The dividend will carry a franking credit equivalent to the taxes paid, i.e., $3,000. If an individual shareholder receives a $7,000 franked dividend, they can utilize the $3,000 franking credit to offset their personal tax obligations. Therefore, if the individual is in the same 30% tax bracket, the franking credit will cancel out the personal tax liability on the dividend income, leaving the shareholder with no further tax to pay.
Now, let’s address some frequently asked questions about franked dividends:
1. Are franked dividends only applicable in Australia?
Yes, franked dividends are commonly seen in countries like Australia as a way to avoid double taxation.
2. Can I claim a franking credit if I pay no tax?
If your income is below the threshold where you are required to pay income tax, the franking credit cannot be refunded to you. However, it can be used to offset tax liabilities on other income if applicable.
3. Can foreign investors benefit from franked dividends?
Foreign investors may still benefit from franked dividends, subject to tax treaties between their home country and the country of investment. The availability of tax credits or refunds depends on the specific agreements in place.
4. Do all companies pay franked dividends?
No, not all companies choose to pay franked dividends. Some companies may not have sufficient profits or choose to retain earnings for reinvestment.
5. How are franking credits calculated?
Franking credits are calculated by multiplying the franking percentage by the dividend payment. For example, a 70% franking credit on a $100 dividend would amount to a $70 franking credit.
6. Can franking credits be shared between shareholders?
No, franking credits cannot be transferred or shared between shareholders. Each shareholder receives franking credits based on the proportion of dividends they are entitled to.
7. What happens to excess franking credits?
Excess franking credits that cannot be utilized by shareholders for tax offset may be refunded to the company under certain conditions.
8. Can franking credits reduce my taxable income?
Franking credits cannot directly reduce your taxable income. However, they can offset the tax otherwise payable on the dividend income.
9. Are all dividends taxable?
Dividends can be either fully franked, partially franked, or unfranked. Fully franked dividends carry attached tax credits, while partially franked or unfranked dividends do not.
10. Are franking credits refundable?
Franking credits can be refunded to eligible taxpayers in certain circumstances, such as when the franking credits exceed the amount of tax payable.
11. Do franking credits apply to all types of shareholders?
Franking credits apply to all shareholders, including individuals, companies, trusts, and superannuation funds.
12. Can franking credits be carried forward?
Franking credits cannot be carried forward or used to create or increase a tax loss. They can only be used to offset tax liabilities in the same income year.