Key Takeaways
- Dividends paid with tax credits from company tax paid.
- Franking credits prevent double taxation on dividends.
- Fully franked dividends yield tax credits refundable if low tax rate.
- Partially franked dividends have credits only on taxed profit portion.
What is Franked Dividend?
A franked dividend is a payment made by Australian companies to shareholders from profits already taxed at the corporate level, accompanied by franking credits that represent the 30% corporate tax paid. This system prevents double taxation by allowing you to claim credits against your personal tax liabilities through the Australian Taxation Office (ATO) imputation system.
Franked dividends are common among companies structured similarly to a C corporation in the U.S., but specifically tailored to Australian tax rules.
Key Characteristics
Franked dividends have distinct features that affect your tax and investment outcomes:
- Franking Credits: These credits reflect corporate tax paid and reduce your personal income tax on dividends.
- Fully and Partially Franked: Dividends can be fully franked (100% credit) or partially franked, depending on the tax paid by the company.
- Tax Offset: Credits offset your tax liability or can lead to refunds if your marginal tax rate is below 30%, linking to ability to pay taxation principles.
- Australian Resident Companies: Only dividends from resident companies qualify for franking credits.
- Holding Period Requirement: To claim credits, you must hold shares for at least 45 days.
How It Works
Companies pay a 30% corporate tax on profits before distributing dividends. These dividends come with franking credits equivalent to the tax paid, which are attached to the dividend statement you receive.
When you file your tax return, you include both the dividend income and the attached franking credits. The credits reduce your personal tax payable, or if your tax rate is lower than 30%, you may receive a refund. This mechanism efficiently avoids double taxation on company profits.
Examples and Use Cases
Franked dividends are particularly relevant when evaluating dividend income and yield from Australian stocks:
- Airlines: Companies like Delta may distribute dividends, although Australian companies typically apply franking credits to domestic investments rather than foreign entities like Delta.
- Dividend Investing: Investors seeking income can explore our best high yield dividend stocks for examples of fully or partially franked dividends.
- Monthly Income: For steady dividend payments with franking benefits, consider stocks listed in the best monthly dividend stocks guide.
Important Considerations
While franked dividends offer tax advantages, you should be mindful of specific factors. The amount of franking credits depends on the company’s tax paid, and not all dividends are fully franked.
Your personal tax situation affects the benefit you receive; lower-income earners may get refunds, while higher earners use credits to offset taxes. Understanding these dynamics is key when assessing dividend stocks, such as those featured in best dividend stocks.
Final Words
Franked dividends provide a valuable tax credit that can reduce your personal tax liability or increase your refund, especially if your marginal rate is below the corporate tax rate. Review your dividend statements carefully and consider consulting a tax professional to maximize these benefits.
Frequently Asked Questions
A franked dividend is a dividend paid by Australian companies from profits that have already been taxed at the corporate level. It comes with franking credits that represent the 30% tax the company has paid, helping shareholders avoid being taxed twice on the same income.
Franking credits attached to dividends show the tax the company has paid on its profits. Shareholders include both the dividend and the franking credit in their tax return, which offsets their personal tax liability or may result in a refund if their tax rate is lower than 30%.
There are fully franked dividends where the company has paid 30% tax on all profits distributed, partially franked dividends where only part of the profits have been taxed, and unfranked dividends where no tax has been paid on the profits distributed.
Franked dividends prevent double taxation by treating company tax as prepaid on behalf of the shareholder. This means shareholders get credit for tax already paid by the company, which can reduce their personal tax or even lead to refunds for lower income earners.
When you receive a dividend notice, it will list both the cash dividend and the franking credits. You need to include both amounts in your Australian Taxation Office (ATO) tax return, so the credits can be applied against your tax liability.
Yes, if your personal tax rate is below 30%, such as in the $18,201 to $45,000 income bracket, you may receive a refund for the excess franking credits after they offset your tax liability.
A 100% franked dividend means the company has paid the full 30% tax on the profits distributed as dividends. Shareholders receive full franking credits, which can significantly reduce or refund their personal tax on that income.
