What is a fully franked dividend? To most Australian stock investors the idea of a franking or imputation credit, is pretty familiar but not everyone fully understands the purposed of fully franked dividends or how they’re calculated. Here’s what you need to know.
What is a fully franked dividend?
Australia was the first ever nation to put into place fully franked dividends. They did so back in 1987 in order to prevent corporate earnings from being taxed twice. Previously, a company’s income may be taxed and then any that were left might be taxed by a shareholder’s personal rate.
Companies, like individuals, are subject to income tax, with the top corporate tax rate set at 30%. Even if your stake in the firm is tiny, you may be eligible for a portion of its earnings which can be paid out if you are an investor. It is possible to prevent double taxation of a company’s earnings if they are paid out of the company’s pre-tax profits rather than after-tax profits. This process is called creating fully franked dividends.
In the case of fully franked dividends, an imputation credit is attached to each payment, which represents how much tax the firm that is providing the company rates has paid in the past. There are several factors to take into consideration when calculating the tax rate for a big corporation, including the individual shareholder’s tax rate. If your maximum rate of tax is less than 30% then the ATO will reimburse you to make up for the gap on your costs.
Full and partial franked dividends: what are they?
Companies that distribute profits to shareholders do not have to pay taxes on the shares that they pay out. Even when the tax has already been paid, you may still get partly or completely unfranked dividends. Prior to the shareholder receiving the payout of the products, either only part of or none of the taxes have been paid.
The shareholder is given a portion of the franking. A big business tax rate of 30% is paid out on 50% of a share that is partially 50%.
A company’s failure to make a profit throughout the fiscal year, or the carrying over of losses from prior years, results in partially or unfranked dividends, which are taxed at a reduced rate. There will be reduced or even zero tax payments if any of these things happen, and as a consequence, any shares will be partly, as a result.
How are fully franked dividends calculated?
Divide the amount of shares by the corporate tax rate, and then remove the amount to arrive at the franking credit calculation for a fully franked dividend.
Here’s how to use it:
Amount of dividends (1 – Company Tax Rate) = Franking Credit Amount.
Your personal rate of tax and that of the firm in which you hold shares play a large role in the calculation of these.
Products with a yield
This is how a shareholder’s franking credit would be computed if they received a $70 share from a major firm with a 30% corporation tax rate:
30-$70 = $70/(1-30) – $70
There would be an additional $30 in franking credits, bringing the payout to $100. In this example, their franking credit payment would be $15 if the product was just 50%. Even if the shareholder declares taxable income of $100, tax is only applied on the shareholder’s $70 with a franking credit.
As a shareholder, you are required to pay taxes on any shares you receive.