Many stock investors have asked this question, “Exactly what are franked dividends?” Well, the answer is not as confusing as it seems. Let’s demystify it for you.
Nearly one in three Australians owns shares in some company. That is a large number. However, some confusion may come in when the payouts roll in.
In many countries, Australia included, returns from shares are taxable income. But these funds were part of the company’s post-tax profit before being disbursed. And when they get to you, you’re required to pay tax again. That means that the funds would be taxed twice.
So, what are franked dividends, if not a system of preventing double taxing? With this system in place, these share returns come with imputation credits that offset the tax liability.
How Do Franked Dividends work?
When share returns come with imputation credits, they positively impact the investor. It reduces the tax paid, in a degree proportional to the difference between the company’s tax rate and that of the individual.
That means that if your tax rate is equal to the company’s, you’ll pay no tax on the returns. And if your tax rate is less, then you can even ask for a refund. Sweet!
But that doesn’t always happen. There are instances when a company branch isn’t taxed before returns are disbursed. Those returns come without those imputation credits and are referred to as unfranked.
There are also cases where the company doesn’t pay all the tax on the share returns.
What Is It Called When This Happens?
They are called Partly Franked Dividends. And in this case, you would have to pay the tax on the unfranked part of the income.
All things considered, it is a sweet enough deal for the investors. While they may be unable to answer the question, “what are franked dividends?” they can see the extra cash.
But how can you know how much imputation or franking credits you have?
What Are Franked Dividends: How To Calculate Franking Credits.
It would be a huge help in tracking your income if you could calculate your franking credits. Don’t fret; you don’t need a business major to figure this out. There is a straightforward formula for it. Here it is:
Franking/imputation Credit = (Amount of dividend/ (1 – Tax Rate on Company Profits)) – Amount of Dividend
Let’s give an instance of you getting returns of $70 from a company that is taxed 30%. Using the formula:
Franking/Imputation Credit = ($70/ (1 – 30%)) – $70 = $30
You’re entitled to $30 of credits from your returns, but your tax rate will decide your next course of action. If it is greater than 30%, you would have to pay the remainder. If it is less, then you can get a tax refund.
Now We Know What Are Franked Dividends.
This system is different from those used in many other countries and has pros and cons. However, the best action in the face of a strange concept is to understand it. Now you have, and you can spread your knowledge. The next time someone asks you, “What are franked dividends?” you’ll know what to reply.
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