What is a franked dividend and what is a franking credit?
A dividend is what a company pays to its shareholders out of its profits.
Any dividends paid to you as a shareholder forms part of your taxable income.
A franked dividend is simply a dividend which has a franking credit attached to it. A franking credit represents the amount of tax paid on the dividend by the company.
Why do we have franking credits in Australia?
Franking credits and franked dividends form part of an arrangement unique to Australia that was devised with the aim of eliminating the double taxation of dividends at both the company tax rate and the personal tax rate. As dividends are paid out of corporate profits, the company may have already paid tax at the relevant corporate tax rate.
When it's time to do your taxes, you would typically declare the tax credit and the dividend payment in order to avoid being taxed twice.
To summarise, franked dividends with franking credits were devised so that a shareholder should not have to pay tax on dividend income which has already been subjected to the company tax rate, as this would result in double taxation.
What’s the difference between franked and unfranked dividends?
Unfranked dividends have not had any tax paid on them, which means they are taxed like any other form of taxable income. There are no tax credits attached to unfranked dividends.
What does it mean when a dividend is 100% franked?
A dividend that is 100% franked, also known as a fully franked dividend, is is a dividend which carries a franking credit against the whole amount of the dividend, meaning, the company has paid a dividend from fully taxed retained earnings.
What's the difference between a fully and partially-franked dividend?
A partially-franked dividend is a dividend in which only part of the tax has been paid by the company. This occurs when a business does not pay the full company tax rate of 30% on its earnings. For example, a partially-franked dividend may occur where the company has only paid tax on 40% of the profit being distributed as dividends.
For individuals and superfunds, if you have excess imputation credits, these may be refunded to you by the ATO.
What are the tax benefits of franking credits?
The benefit of fully franked dividends (and partially-franked dividends) is that the shareholder receives a tax credit to reduce the tax payable on dividend income. Such dividends are particularly useful as part of an investment strategy aimed at reducing tax payable.
For more on this, see below on why franked dividends can be so valuable to retirees
Franking credits help reduce tax liability and in some cases, having excess franking credits may lead to a refund where the investor's marginal tax rate is below the 30% company tax rate.
How do you calculate a grossed-up fully-franked dividend yield?
To calculate a grossed-up fully-franked dividend you divide the dividend yield by 70 and multiply by 100. For example, if a company declares a dividend of $100 fully fully franked, the grossed-up dividend is $142.85, including franking credits of $42.85.
How long do I have to hold the shares to be eligible for the tax deduction?
To be eligible for the franking tax offset, that is, the tax deduction afforded by franking credits, you must continuously hold your shares at risk for a minimum of 45 calendar days. You must also have purchased the shares before the ex-dividend date and they must be in your possession on the ex-dividend rate.
Why franked dividends can be so valuable to retirees
Franked dividends can be valuable to retirees because retirees typically have a low level of income and a correspondingly low marginal tax rate as a result. In a scenario where a retiree has a level of income below $18,200, instead of reducing tax payable the excess franking credits are returned as a tax refund.
When investors in Australian companies receive dividends they may also receive franking credits if the dividends are partially franked or fully franked. These franking credits represent the tax the company has paid on its profits in Australia. As dividends are usually funded from profits, the dollars paid to investors in the form of the dividends may have already been taxed.
Depending on the investor's marginal tax rate, they may be able to use the franking credits to reduce their taxable income or even gain a tax refund.
If you're unsure whether or not you are receiving the full tax benefits of your shares, please reach out to us today to book a call with one of our tax and superfund experts.
If you aren't currently receiving adequate financial advice, we can put you in touch with one of our expert partners in the financial advisory field.
Causbrooks gives you a client manager supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business.
Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.