Franked Dividend

Last updated on 2023-09-26 13:58:47

A franked dividend is an arrangement in Australia that eliminates the double taxation of dividends. The shareholder can reduce the tax paid on the dividend by an amount equal to the tax imputation credits. An individual’s marginal tax rate and the tax rate for the company issuing the dividend affect how much tax an individual owes on a dividend.

Definition: Franking Credits, also known as imputed credits, are a tax arrangement in Australia designed to eliminate the double taxation of dividends. Through this arrangement, shareholders can reduce their payable dividend tax using tax credits. The amount of tax a shareholder owes on dividends depends on their marginal tax rate and the tax rate of the company paying the dividends.

Origin: The franking credits system was first introduced by the Australian government in 1987 to address the issue of double taxation on company profits distributed as dividends. This system allows companies to attach tax credits to dividends paid, enabling shareholders to use these credits when filing their personal income tax returns.

Categories and Characteristics: Franking credits can be categorized into fully franked dividends and partially franked dividends.

• Fully Franked Dividends: Dividends paid by the company come with full tax credits, allowing shareholders to fully offset their payable tax.
• Partially Franked Dividends: Dividends paid by the company come with partial tax credits, allowing shareholders to partially offset their payable tax.

The main characteristic of this arrangement is its ability to effectively reduce the tax burden on shareholders, especially those with higher marginal tax rates.

Specific Cases:

1. Suppose a company pays a fully franked dividend of AUD 100 with an attached tax credit of AUD 30. If the shareholder's marginal tax rate is 30%, they do not need to pay additional tax on this AUD 100 dividend.
2. If the same company pays a partially franked dividend of AUD 100 with an attached tax credit of AUD 15, and the shareholder's marginal tax rate is 30%, the shareholder needs to pay an additional AUD 15 in tax on this AUD 100 dividend (AUD 30 tax minus AUD 15 tax credit).

Common Questions:

• What are franking credits? Franking credits are tax credits attached to dividends paid by a company, which shareholders can use to reduce their payable tax when filing personal income tax returns.
• How to calculate the tax impact of franking credits? The calculation involves considering the shareholder's marginal tax rate and the tax credits attached to the dividends paid by the company.

The above content is a further interpretation by AI.Disclaimer