If you are an Australian shareholder, perhaps you have heard about “franked dividends” or even you have received one without knowing what it is and how you get it. Some people perhaps just say yes when receiving their dividends without understanding the benefits, backgrounds, or even tax implications for them.
In this guide, we will explain to you what franked dividends are, what are the benefits for you, and how it can influence the market.
What Are Franked Dividends?
A franked dividend are shares that are receiving tax credit benefit. What does that mean? In Australia, profits are taxed on a yearly basis for companies. Generally, the amount of tax is 30% flat. Once the tax is collected by the government, the rest of the profits are distributed to the shareholders. Since the share profits are embodied with a taxable income in Australia, shareholders do not need to worry about it because they have already been paid previously by the company.
Previously, before the franking system, the Australian government earned double taxation. One is from the company’s 30% flat rate profit tax. The second, is earned from the shareholders’ taxable income, which is different in amount depending on each holder.
How Do Franked Dividends Work?
People sometimes have a hard time understanding franked dividends and how it works. Now that you have understood the definition, we’ll move to how it works or how you can leverage from this. Practically, when you file your taxes to the government, you have to include both the dividends and the tax credit that you earn from the franking system.
Keep in mind that including both dividends and the tax credits are crucial. This is to ensure that the government knows that you are a franked dividend receiver and that you will not be charged an income tax on your dividends. If you are not doing this, then you will have to be ready to be charged for your income tax.
At first, perhaps it looks complicated for you. However, once you get a good grip of it, franking systems are a forthright regulation that can give you benefits of non-taxed income for your dividends.
Types of Franking System
While a franked dividend lets you receive the full non-taxable benefits, there is an additional type that is called a partial franked dividend. What makes a full and partial difference? In full, your profits are fully non-taxable income, which means the taxes are already paid by the company’s 30% flat rate tax.
On the other hand, a partial will give you a share of profits that is partially taxable. This is because the company is not fully paid their tax, and thus the shareholders will be taxed accordingly to the percentage amount that the company hasn’t been paying.
Advantages of Franking System
Apart from its benefits to the shareholders, franked dividends have a positive impact economically and nationally. Investing in publicly listed firms that pay dividends might be deterred by double taxation, according to the most common argument. It’s common for small enterprises to have flow-through taxation that allows investors to just pay income taxes.
Large corporations are required to pay taxable income, and then their shareholders are taxed once more on dividends they receive. On the surface, double taxes seem to be unjust. As a result, it might lead to a decrease in economic efficiency and reduced revenues.
Leveraging From the Franking System
The franking system is a fair regulation in Australia that allows shareholders to earn their dividends without having to worry about the income tax. Not only this, the benefits are going beyond the shareholders and reaching the nationwide economical scale and also influencing the markets. Whether as shareholders or companies, you have the same opportunities to leverage from the franked dividends.