Have you ever heard about franking dividends? Well, before we get to that, let us begin with dividends. This term refers to the transfer of a value to a shareholder. Many companies pay shareholders for the profits they have made within a timeframe. All these add up to form the taxable income of the shareholder. However, this would have been subjected to tax by the company since the payment is from the profit of the company.
Companies pay these at different times. For some, it could be monthly, quarterly, or annually, or also paid during the standalone event as certain distributions. The implication is that there should be no individual income tax on these because they have already been taxed before the company pays them.
What is the franking dividend?
Franking dividends refer to an arrangement that helps remove the double taxation that may arise from tips. A credit is attached to a franking dividend to represent the amount of tax the company has previously paid. A shareholder can reduce the amount of tax they are to pay on a product if the amount is equal to the franked credit.
A shareholder can lower the amount of tax by using an amount equal to the tax imputation credits. The company’s tax rate issuing the product and the person’s marginal tax rate explains the amount the person owes on it.
An individual pays their dues with the attached tax credit. The reason is to eliminate any possibility of double taxation on investors from the products. Hence, it reduces the tax burden an investor may experience.
How can I calculate my credits?
Franking dividends can be total (100%) and partially (lower than 100%). There is a formula to calculate your franking credit if it is a fully franked product. It goes thus;
Credit = (Dividend Amount ÷ (1 – Company Tax Rate) – Dividend Amount
Let use real figures. If the product is $1,000 and corporate tax rate is 30%, then the calculations would be;
Credit = ($1,000 ÷ (1 – 0.30)) – $1,000
= ($1,000 ÷ 0.70) – $1,000
What are the types of Franking Dividends?
There are two common types. They are;
- Fully franked
- Partially franked
The fully franked product means that the company is responsible for the total pay. Hence, their investors collect 100% of the tax that was paid as credits. However, partially franked shares will mean that investors are to pay a part of their tax.
Advantages of Franking Dividends
The advantage franking dividends offer is evident in that it eliminates double taxation. However, there are other advantages for society and markets. They include;
- It discourages investing in companies that trade publicly and make better investment choices.
- They support the creation of more stability for competitive markets
- They remove the tax burden on these products
- It reduces competition and improves efficiency and consumer choice
It is good to understand franking dividends and how it works properly. It is advisable to communicate with a financial expert if you are uncertain about anything.