What is Franking Dividend?
Franking dividend, also known as franked dividend, is a unique system used in many countries, including Australia, to eliminate the double taxation of dividends. It is a process through which companies attach a “franking credit” to the dividends they pay out to their shareholders. These credits represent the taxes the company has already paid on its profits.
When a company generates profit, it is required to pay taxes on that income. Once these taxes are paid, the company can then distribute the remaining profits to its shareholders in the form of dividends. However, without franking dividends, individual shareholders would be subject to paying taxes again on the dividends they receive, leading to double taxation.
By attaching franking credits to dividends, companies pass on the benefit of the taxes already paid to their shareholders. This means that when dividends are received, shareholders can claim the corresponding franking credits against their own tax obligations, reducing or eliminating any additional tax liabilities they may have.
Franking dividend is an important mechanism designed to ensure fairness and prevent the double taxation of dividends. It provides an incentive for individuals to invest in companies and promotes a more efficient allocation of capital in the economy. By reducing tax liabilities, franking credits can enhance the overall return on investment for shareholders.
FAQs about Franking Dividend:
1. How are franking credits calculated?
Franking credits are calculated by multiplying the amount of the dividend by the corporate tax rate applicable to the company.
2. Can franking credits be refunded?
Yes, if the franking credits exceed the individual’s tax liability, they can be refunded by the tax authorities.
3. Can individuals in a lower tax bracket benefit from franking credits?
Yes, individuals in lower tax brackets may receive a cash refund if the franking credits exceed their tax liability.
4. Do all companies pay franked dividends?
No, not all companies pay franked dividends. Companies that have not paid taxes or made tax losses do not have franking credits to attach to their dividends.
5. Are franking credits available for foreign shareholders?
Franking credits are only available to Australian residents for tax purposes. Foreign shareholders usually cannot benefit from these credits.
6. How do franking credits affect my taxable income?
Franking credits offset your tax liability by reducing the amount of taxable income you must report.
7. Can franking credits be carried forward to future years?
Yes, unused franking credits can be carried forward to offset future tax liabilities.
8. Are franking credits the same as tax deductions?
No, franking credits are not tax deductions. They are tax offsets that directly reduce the amount of tax payable.
9. Do franking credits apply to all types of dividends?
Franking credits can be applied to all types of dividends, including fully franked, partially franked, and unfranked dividends.
10. How do franking credits impact the share price?
Franking credits can positively impact the share price as they increase the after-tax return for shareholders.
11. Are there any limitations on claiming franking credits?
Yes, there are certain limitations based on ownership thresholds and anti-avoidance measures to prevent misuse of franking credits.
12. Can franking credits be used to offset other types of tax?
Yes, franking credits can be used to offset other types of taxes like capital gains tax or the Medicare levy, reducing the overall tax liability.