If you are a business person, you should know the major concepts of investment. The first one is the credits, and the second is the yield. The yield is the financial ratio used to measure the substantial payouts made to investors concerning the market value for every share. Including franked dividends make the yield more appealing. The two co-exist for the benefit of the shareholder.
In this article, we focus on what franked dividends are and everything related to them. Doing this will enable you, as the shareholder learn how they work and hence, how to go about the whole process.
What are Franked Dividends?
This is a profit made from a company and shared with an investor. Most shareholders sporadically receive their payouts out of the profits of the investment companies. These paid to the investors are considered a taxable income. However, since the payments come from the company’s earnings, they have already undergone taxation- at a corporate level. Therefore, the profits received by the investor shouldn’t undergo taxation because that will be double taxation.
Franked dividends prevent the individual income of the investor from undergoing double taxation. In simpler terms, a franked dividend is an arrangement by the Australian government to get rid of double taxation of the investor’s proceeds. A product like this comes with a credit representing the tax amount that has been paid by the company. Therefore, an investor can minimize the tax paid by a similar amount of the credit.
The system used to abolish double taxation on earnings received by investors is called imputation. It simply means the system offsets taxes for shareholders. The system is referred to as imputation as it recognizes taxes owed by a company to its shareholders.
Tax Implications for Investors
The payouts an investor receive determine the amount of tax to be paid towards the end of the financial year. Therefore, it is essential to understand the whole concept of franked dividends. They are categorized into three parts and are as follows.
· Franked Dividends
This type is inclusive of a credit or imputation credit. A product like this holds the same value as the tax paid by the company for a section of your shares in the company. With these, you can reduce your taxable income using the accumulated credits and in this case, a 30% tax reduction.
A product like this means it doesn’t hold any tax credit. This happens when the company doesn’t pay tax on the earnings you as an investor receives. As a result, you pay the tax on the total amount of income you receive.
· Partially franked
As the name suggests, these products mean the company has partly paid tax on the payouts received. It means that there are unfranked parts that have not been taxed.
Many Australian companies pay but don’t usually pay tax on the earnings they redistribute to the investors. However, when they actually pay the tax, the investors get fully franked dividends. Those that don’t pay at all, the investors receive unfranked dividends and are required to pay tax on their income.
Many investors would want to know whether they receive payouts or not. In this case, you can find all your shareholder information through your statement. For franked dividends, a credit amount is clearly shown on the statement. By using the imputation system, you can submit the proceeds with the payout as your income. In this case, you will only be subjected to paying the difference between the marginal and corporate rates.