What does franked dividend mean?

A franked dividend is a form of dividend payment that includes a tax credit attached to it. This tax credit represents the amount of tax already paid by the company on the profits from which the dividends are being distributed. Franking credits can be quite beneficial for shareholders, especially those in higher tax brackets.

When a company earns profits, it is required to pay taxes on those profits to the government. Once the taxes are paid, the remaining profit is distributed among the shareholders as dividends. In some countries like Australia, the government allows companies to attach a franking credit to the dividends they distribute.

The franking credit is essentially a tax credit that represents the tax already paid by the company on the underlying profits. This credit can then be used by shareholders to offset their own tax liabilities. For example, if a company has already paid a tax rate of 30% on its profits, the franking credit attached to its dividends will also be 30%.

When shareholders receive a franked dividend, they are also entitled to claim the franking credit as a tax offset against their own tax payable for that financial year. This essentially means that the tax already paid by the company on the distributed profits is considered as a tax payment made by the shareholder, reducing their overall tax liability.

Franked dividends can be especially beneficial for individuals in higher tax brackets, as the franking credits can effectively lower their tax bill. On the other hand, shareholders in lower tax brackets may not be able to fully utilize the franking credits and may need to claim a refund for the excess credits from the tax office.

Overall, franked dividends provide a fair and transparent way to distribute profits among shareholders while ensuring that the taxes on those profits are paid. By attaching franking credits to dividends, companies encourage investment and provide an incentive for shareholders to hold onto their shares for a longer period, as the tax benefit can add to the overall returns.

Frequently Asked Questions (FAQs)

1. How are franking credits calculated?

Franking credits are calculated by multiplying the dividend amount by the corporate tax rate of the company.

2. Are franked dividends taxable?

Yes, franked dividends are taxable and are included in the shareholder’s assessable income. However, the franking credits offset a portion of the tax liability.

3. Can individuals claim franking credits?

Yes, individuals can claim franking credits as a tax offset, which helps reduce their overall tax bill.

4. Do all countries allow franking credits?

No, not all countries allow the use of franking credits. It depends on the tax laws and regulations of each country.

5. What happens if a shareholder’s tax liability is lower than the franking credits received?

If a shareholder’s tax liability is lower than the franking credits received, they may be eligible for a refund of the excess credits.

6. Can franking credits be transferred between shareholders?

No, franking credits cannot be transferred between shareholders. Each shareholder can only utilize the franking credits attached to the dividends they receive.

7. Do franking credits expire?

No, franking credits do not have an expiry date. They can be carried forward to future years if not fully utilized.

8. Are franking credits refundable?

Yes, if a shareholder’s tax liability is lower than the franking credits received, they can claim a refund for the excess credits.

9. Are all dividends franked?

No, not all dividends are franked. It depends on whether a company has already paid taxes on the profits from which the dividends are being distributed.

10. Can franking credits be used to offset other types of income?

Yes, franking credits can be used to offset other types of income, such as interest or capital gains.

11. Do all companies pay taxes on their profits?

No, not all companies pay taxes on their profits. Some companies may be exempt from taxes or may have carry-forward losses that reduce their tax liabilities.

12. Can franking credits be transferred to future financial years?

Yes, if a shareholder cannot fully utilize the franking credits in the current financial year, they can carry them forward to offset tax liabilities in future years.

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