MASTERCLASS Investment – Franking Credits, Franked Dividends, Imputed tax credits – what they mean

MASTERCLASS Investment – Franking Credits, Franked Dividends, Imputed tax credits – what they mean

Investment – Franking Credits, Franked Dividends, Imputed tax credits – what they mean

In Australia and several other countries, if a company pays tax on the profit/earnings and distributes some or all to shareholders as dividends, they are known as Franked Dividends. If the corporation has not paid tax, they are Un-Franked Dividends. This eliminates the double taxation of cash payouts from a corporation to its shareholders who would have to then pay tax on the dividend income also. Another name is that the dividends have Franking Credits or Imputed tax credits and Australia has allowed dividend imputation since 1987. Through the use of franking credits the tax authorities are notified that a company has already paid the required income tax (currently 30%) on the income it distributes as dividends. The shareholder then does not have to pay tax on the dividend income, if their personal tax is under 30% (say it’s 17%, then they will get a credit for the difference, 12%: BUT if their tax is higher, eg 45%, they will need to pay more tax, 15% more on the 30% already paid on the dividend amount) . Finland, Italy, Mexico and New Zealand also have dividend imputation systems.

In other countries, corporate dividends are taxed twice, known as double taxation of dividends, which  occurs when both a company and a shareholder pay tax on the same income. The company pays taxes on profits and subsequently distributes a dividend out of its after-tax profits. Shareholders must then pay tax on the dividend received. The double taxation system can cause corporations to prefer to raise debt over equity (shares), and also means companies are more likely to retain their earnings, and can drag down economic growth.

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See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

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