What does fully franked dividend mean?
A fully franked dividend is a type of dividend payment made by Australian companies to their shareholders. It refers to dividends that have already had the company tax paid on them at the corporate tax rate of 30%. These dividends are considered to be “fully franked” because the tax has already been taken care of, and shareholders receive a credit for the tax paid by the company. This unique system is designed to avoid double taxation, ensuring that shareholders are not taxed twice on the same income.
FAQs:
1. How are fully franked dividends different from other dividends?
Fully franked dividends are different because they have already had the tax paid at the corporate tax rate, while other dividends may not have had any tax paid or have only had partial tax paid.
2. Why do Australian companies pay fully franked dividends?
Australian companies pay fully franked dividends to ensure that shareholders are not taxed twice on the same income. It is a way to avoid double taxation and provide transparency in the dividend payment process.
3. Are fully franked dividends only applicable in Australia?
Yes, fully franked dividends are unique to Australia. Other countries may have different systems in place for taxing dividends.
4. How does the franking credit system work?
The franking credit system allows shareholders to receive a credit for the tax paid by the company on the dividends. This credit can be used to offset the individual’s personal income tax liability.
5. Can you explain the concept of double taxation in relation to dividends?
Double taxation occurs when both the company and the shareholders are taxed on the same income. Fully franked dividends help avoid double taxation by ensuring that tax is paid once at the corporate level, and shareholders receive a credit for that tax paid.
6. Are fully franked dividends always beneficial for shareholders?
Fully franked dividends are generally beneficial for shareholders, as they provide transparency and avoid double taxation. However, the actual benefit depends on the individual’s tax position and personal circumstances.
7. What happens if an individual’s tax rate is lower than the corporate tax rate?
If an individual’s tax rate is lower than the corporate tax rate, they may receive a refund for the difference between the two tax rates. The excess franking credits can be refunded by the Australian Taxation Office (ATO).
8. Are there any limitations on fully franked dividends?
While fully franked dividends are a common practice in Australia, companies are not required to pay fully franked dividends. The decision to fully frank a dividend rests with the company’s management.
9. Do all Australian companies pay fully franked dividends?
No, not all Australian companies pay fully franked dividends. Some companies may choose to pay partially franked dividends or no dividends at all.
10. Can foreign investors benefit from fully franked dividends?
Foreign investors may also benefit from fully franked dividends if their home country has a double taxation agreement with Australia. However, the specific tax rules vary depending on the investor’s country of residence.
11. How are fully franked dividends disclosed to shareholders?
Companies generally disclose the franking status of dividends in their annual reports and other relevant communications to shareholders. This allows shareholders to understand the tax implications of the dividends they receive.
12. Are there any disadvantages of fully franked dividends for companies?
One potential disadvantage for companies is that fully franked dividends can limit their ability to retain earnings for investment or future growth. By paying out fully franked dividends, companies distribute a larger portion of their profits to shareholders, leaving fewer funds for internal reinvestment.