Franked Dividend

Franked Dividend
See also


Franked Dividend means the company has paid tax on its profits and when this happens you get a franking credit. Franking credits are tax offsets that you can apply against the next tax payable on dividends ( and other income) you derive. If you're a low income earner any excess franking credits will be refunded back to you, and the return on your investment will increase. With respect to real estate there are significant tax benefits from owning an income-producing property, such as depreciation deductions and a capital works deduction. The federal government has also introduced the first home saving accounts where it will contribute money to help you save for a deposit. Any interest derived will be taxed at the rate 15 per cent. Any capital gains you make on sale of your main residence is totally exempt from tax. The downside is if you make a capital loss you will not be able to make use of it as the property is exempt[1].

Tax law of franked dividends

The tax law prescribes when a dividend paid is capable of being franked. A company can frank a dividend, if[2]:

  • it is a franking entity that satisfies the residency requirement when the dividend is made
  • the dividend is frankable
  • the company allocates a franking credit to the dividend

A dividend is not a frankable distribution if it is sourced, directly or indirectly, from a company's share capital account. Provided the dividend does not fall within any of the other exclusions, the dividend is capable of being franked.

Type of dividend payment

Your dividend payment could be[3]:

  • fully franked dividend means the company has paid 30 per cent tax on its profits. This benefit, referred to as a franking credit, can be passed on to you (and your dividend yield increases). You can get a franked dividend only from a resident Australian company.
  • partially franked if the dividends is partially franked, you receive a franking credit to the extent the dividend is franked.
  • unfranked if you receive an unfranked dividend, the company may not have paid taxes on its profits. You receive no franking credits if the dividend is unfranked. If you receive an unfranked dividend, you pay more tax because no tax offset is available for you to deduct from the net tax payable.

Grossing-up of franked dividends

The ultimate objective of the imputation system is to ensure, that, when shareholders receive dividends from a company, their after-tax income is the same as if they were in a partnership and received their share of the business's net income. This is achieved by the shareholders having imputed to them a grossed-up dividend amount can be calculated by either one of the following two methods[4]:

  • directly calculate each shareholders's share of the company's net income before tax from which the dividend was derived.
  • for each shareholder, add the amount of the imputation credit to the amount of the dividend received: Dividend+ imputation credit= Grossed-up dividend amount

Footnotes

  1. J.B. Prince 2011, p.130
  2. Top 100 Tax Q and As 2012, p.26-27
  3. J.B. Prince 2016, p.94
  4. J. Petty, S. Titman, A.J Keown 2015, p.38-39

References

Author: Ewa Szczyrbak