In Australia, a lot of listed businesses, miners, banks, and Telstra are identified with dividend income payments. The dividend yield averages slightly over 4% since inception, which was in 1980. What makes the dividend yields more decorative is the inclusion of franked credits, particularly involving the SMSF investors who are in the phase of retirement.
In the past, dividends experienced double taxation, in that the companies were taxed on the profits and the shareholders paid tax on the profit dividends as well. Fortunately, today, the companies that paid the Australian tax from the dividends now receive imputation. Imputation, in this case, means giving credit for the paid dividends over the years. It enables shareholders to get credit for the tax paid by the facilities they had their shares.
Today, in this article, we will discuss more on franked dividends to see how important they are.
Before we go further, it is important to know what dividends are. Dividends are part of the profits yielded from the shares you purchase in a listed company where you become a shareholder. They reflect a shareholder payout from the company yield as an incentive for investing in the organization. While shares from the dividends seem attractive for a large number of Australian investors, some will still reinvest the yield to increase their assets further.
What are Franked Dividends?
As mentioned, the previous years in the Australian government saw companies and investors receive double taxation on the yields. That is not the case today, thanks to what we call Franked dividends. A franked dividend is an Australian agreement that scraps off double taxations of yields. This way, the investor reduces the dividend tax payment by a similar amount of the tax imputation. The marginal tax rate of an individual and the company tax rate for the dividends will determine the amount of tax owed on a dividend.
How do they work?
An investment company pays dividends to its shareholders from the profits obtained. Oftentimes, the payments come periodically (monthly, or quarterly, annually, etc.). Other times, the payments can be made through special allocations in separate events. Seeing that the payments come from the profits, this means that the dividends have already been taxed at the company level. Therefore, when a shareholder receives franked dividends, they are not obligated to pay tax on them when paying their income taxes as that would be double taxation.
Franked dividends prevent double taxation by providing the shareholders with a tax credit, often referred to as franking credit. The franking credit is the tax amount that was paid by the company on the dividend. When the investor submits both the dividend and franking credit, they will only be taxed on the dividend share.
What are the different types?
They come in two types; fully and partially franked. If the shares are fully franked, the investment company is taxed on the yield. Investors will then collect 100% of the dividend-paid tax in the form of franking credits. Partially franked dividends, on the other hand, means that the shareholders may be subjected to paying tax on the shares.
Some companies request tax deductions, probably because of the losses incurred from the previous years. Doing so enables them to avoid paying the full tax rate on the annual profits received. In this case, the companies don’t pay the adequate tax that will enable legal attachment of full tax credit on the dividends that shareholders get. Consequently, a tax credit is attached to a portion of the profits, making them franked dividends. The remaining dividend will not be taxed, nor will it be franked. This means that the dividend is partially franked and the shareholder is made to pay the remaining tax balance.