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What is a Franked Dividend?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 12 September 2016
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A franked dividend is a type of dividend imputation system that is used in Australia. Dividend imputations are systems that help share the tax burdens of a dividend between the company that issues the dividend and the shareholder. The intent of tax imputation systems is to eliminate double taxation on dividends.

Dividends are handed out to shareholders in companies based on their level of investment in the company. Shareholders expecting dividends from a company will need to know about the ex-date of a dividend that determines who will get the dividend, the date of record, and the payment date. Dividends are a way for investors to get more out of a stock purchase than just the accumulated value over time.

One issue with dividends regards taxation. Many types of dividends can end up getting taxed twice. Stockholders, investors and finance professionals often find this to be an unfair system. Some nations have constructed dividend imputation systems as a way to fix double taxation on dividends.

Australia’s franked dividend system includes a “franking credit” for dividend amounts. The shareholder is assessed on a tax-inclusive value for a dividend. Then, the investor is given a franking credit that lowers their tax burden for the dividend.

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The franked dividend is just one option for designing systems to eliminate double taxation. The U.K. uses a “notional tax credit” that reflects what the company has paid in taxes. In Canada, where investors are taxed on a tax-inclusive dividend, tax credits are also used. A U.S. system includes different tax rates for dividends depending on an individual’s total income level.

In addition to the idea of double taxation for dividends, investors can see even more issues with reinvested dividends. If the investor does not calculate the already taxed dividends into a correct cost basis, he or she will pay taxes on them twice; investors are taxed once when dividends are received, and another time when the total gains are sold. This means an investor should look carefully at how dividends are reinvested to be sure they are not getting overtaxed.

Some American finance experts have argued in favor a type of dividend imputation similar to the franked dividend to apply to the U.S. investor. Dividend imputations, according to these professionals, limit the liabilities of doing business in a particular country. These kinds of solutions are intended to fix problems with inconsistent or unfair tax rates on forms of income that can discourage certain types of business or investment.

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anon296357
Post 4

When a person invests, the ratio of cash input is just one. If you save and get the pathetic interest from deposit, the bank could use your money to create more money via a fractional banking system. Why should it not make economic sense? That is what we know as steroid money, or rather, legal money minting.

JaneAir
Post 3

I think it's crazy that even under a system that uses franked dividends, investors can get taxed twice when they reinvest their dividends paid. This doesn't seem to make economic sense to me, because it would discourage people from reinvesting their dividends.

Shouldn't any country be encouraging people to invest instead of hoard their money in a savings account or something?

ceilingcat
Post 2

@starrynight - Actually, it does make sense if you consider a dividend income. Individuals with higher income supposedly pay a higher tax rate (although in practice they often do not), so they should pay the same higher rate on a dividend. However, if you just consider a dividend on its own, it would make sense for everyone to pay the same rate.

Honestly, I think it would make sense if more countries tried to adopt the same kind of dividend income tax. I'm sure it would simplify international investing a lot.

starrynight
Post 1

I think a franked dividend makes a lot of sense. The government ends up getting paid twice on an unfranked dividend, and I don't think that's totally fair. Why should both the investor and the company have to pay? They should at least split the amount! At least the franked dividend has both the company and the shareholder paying equally.

I think it also makes sense that it doesn't take into account the total income level of the individual. In my opinion, the way we do it in this country is kind of messed up. Your income level shouldn't affect how much you're taxed on a dividend, it just doesn't make any sense.

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