Franked Dividend

Definition

Franking credits, also known as imputed credits, are an Australian arrangement designed to eliminate the double taxation of dividends. Shareholders can reduce their payable dividend tax through tax credits. The individual's marginal tax rate and the dividend-paying company's tax rate affect the amount of tax payable on dividends.

Origin

The franking credits system originated from the Australian government's tax reform in 1987, aimed at preventing the double taxation of company profits at both the corporate and shareholder levels. This system was introduced to encourage investment and enhance shareholders' after-tax returns.

Categories and Features

Franking credits are mainly categorized into fully franked and partially franked dividends. Fully franked dividends mean the company has paid corporate tax on the entire dividend, allowing shareholders to receive full tax credits. Partially franked dividends indicate that the company has only paid tax on part of the dividend, so shareholders receive partial tax credits. The advantage of this system is the reduction of shareholders' tax burden, but its complexity can lead to difficulties in understanding and calculation.

Case Studies

Case Study 1: Commonwealth Bank of Australia (CBA) typically pays fully franked dividends in its annual payouts, allowing shareholders to utilize full tax credits to reduce their personal income tax. Case Study 2: Telstra, an Australian telecommunications company, sometimes pays partially franked dividends, meaning shareholders receive partial tax credits depending on the amount of tax paid by the company.

Common Issues

Common issues for investors include how to calculate the amount of tax credits and how to correctly report them during tax filing. A common misconception is that all dividends come with full tax credits, whereas this actually depends on the amount of tax paid by the company.