October 19, 2018

What is a Franked Dividend?

An Australian investor can receive rewards for investing in a company.  These can be in the form of share of its earnings, more commonly known as dividends that are distributed to all the shareholders of the company. In general, dividends are paid twice a year. However, since it is based on profits, the size of the dividend varies, and there’s no guarantee that you will receive any.

A franked dividend refers to the dividend that has a tax credit attached to it.

There are two types of dividends: franked and unfranked. A franked dividend refers to the dividend that has a tax credit attached to it. On the other hand, the unfranked dividend lacks a tax credit. In this article, let’s focus on franked dividends.

Here are the top 7 things that you need to know franked dividend: 

  1. It’s commonly known that companies pay tax for their profits. Franked dividends refer to dividends or profits that are distributed after tax. It comes with a franking credit, also called imputation credit, that indicates the amount of tax that is paid by the company.
  2. 1987 was the year when the dividend imputation was introduced to end double taxation of the profits of the company. With this setup, tax that was paid by the companies was attributed to their respective investors.
  3. Companies pay tax at 30 percent. The remaining 70 percent cash can be paid as dividends to the shareholders.
  4. Based on how much tax the company had already paid, the dividend can either be fully franked or partly franked.
  5. When it comes to profits overseas, there will be no credits for tax paid. In other words, companies that earns income from a different country or doesn’t pay tax in Australia will pay unfranked dividends.
  6. Shareholders also pay tax on the income at the marginal tax rate. This happens when the companies pay portion of their income as dividends. On the other hand, the shareholders will receive a personal tax credit, also called a franking credit, from the tax office.
  7. In some cases, there are banks that pay dividends of nine percent after franking credits are considered. In this way, there is a better return compared to depositing the money that may only give you about one to two percent interest.

These are just some of the things that you need to know about franked dividends. It’s better to seek professional advice to better understand the ins and outs of this type of dividend.

Do you have other ideas on franked dividends and investment property tax in Australia? Share your insights in the comments section.

About the author  ⁄ Marxa Dillan

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