Loading the player...

What is a 'Franked Dividend'

A franked dividend is an arrangement in Australia that eliminates the double taxation of dividends. The shareholder is able to reduce the tax paid on the dividend by an amount equal to the tax imputation credits. An individual’s marginal tax rate and the tax rate for the company issuing the dividend affect how much tax an individual owes on a dividend.

BREAKING DOWN 'Franked Dividend'

Because dividends are paid out of company profits that have already been taxed, shareholders are responsible for a smaller portion of tax on those dividends. Since investors receive a credit for the amount of tax the business paid on a dividend, if the investor’s tax rate is below the company’s tax rate, the investor receives a refund of the difference from the Australian Tax Office (ATO).

For example, Sarah invests in a company that pays her a fully franked dividend of $800. Her dividend statement indicates a franking credit of $270. If the dividend were unfranked, Sarah would have owed taxes on the entire $1,070 ($800 + $270 = $1,070.) Therefore, when Sarah files her taxes, she declares $1,070 as part of her taxable income. Because her marginal tax rate is 20%, she would have paid $214 if the dividend were unfranked. Because the dividend is franked and the company paid $270 in taxes, Sarah receives the difference of $56.

Fully Franked Dividends

When a stock’s shares are fully franked, the company pays tax on the entire dividend. Investors receive 100% of the tax paid on the dividend as franking credits.

In contrast, shares that are not fully franked may result in tax payments for investors. Because of tax deductions businesses may claim, such as losses from preceding years, the company issuing the dividend might not pay the entire tax rate on its profits in a given year. When this happens, not enough tax is paid by the business for attaching a full tax credit to the dividends paid to shareholders. As a result, a tax credit is attached to some of the dividend, making that portion franked, and leaving the rest of the dividend untaxed, or unfranked. The dividend is then partly franked. The investor is responsible for paying the remaining tax balance.

Example of Franked Dividends

In April 2016, New York-based investment firm VanEck announced its launch of its security called the VanEck Vectors S&P/ASX Franked Dividend ETF. The security was the first exchange-traded fund (ETF) in Australia that included companies in the S&P/ASX 200 that paid out 100% franked dividends in the preceding two years and have sustainable dividend policies. The EFT is designed to track the S&P/ASX Franked Dividend Index that S&P Dow Jones Indices created with VanEck. The security was designed for increased flexibility, transparency and cost-effectiveness.

RELATED TERMS
  1. Franking Credit

    A type of tax credit found in countries such as Australia that ...
  2. Dividend Imputation

    An arrangement in Australia and several other countries that ...
  3. Franked Income

    After-tax investment income that is distributed by one U.K. company ...
  4. Dividend Tax Credit

    The amount a Canadian resident applies against their tax owing ...
  5. Dividend

    A distribution of a portion of a company's earnings, decided ...
  6. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
Related Articles
  1. Taxes

    What's a Franked Dividend?

    A franked dividend is an arrangement in Australia that eliminates the double taxation of dividends.
  2. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  3. Taxes

    3 Tax Implications of Dividend Stocks

    Dividend paying companies are attractive in a low interest rate environment, but income seeking investors have to be careful of the potential tax hit.
  4. Investing

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
  5. Investing

    Dividends Still Look Good After All These Years

    Find out how this "first love" still holds its bloom as it ages.
  6. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  7. Taxes

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  8. Investing

    The Top 5 Countries for Dividend Investing (WBK, BBL)

    Read about the five best foreign countries for American dividend investors, based on a ranking of their average after-tax dividends and tax-withholding laws.
  9. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the price of the underlying stock, the role of market psychology and how to predict price changes after dividend declaration.
  10. Investing

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
RELATED FAQS
  1. If I reinvest my dividends, are they still taxable?

    Take a brief look at how the Internal Revenue Service taxes different kinds of dividends, including taxation on dividends ... Read Answer >>
  2. In what situations must taxes be paid on a stock dividend?

    Understand the situations in which investors must pay taxes on stock dividends received, and the different tax rates that ... Read Answer >>
  3. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  4. How are capital gains and dividends taxed differently?

    The U.S. tax code gives similar treatment to dividends and capital gains, although this will change slightly in 2013. Currently, ... Read Answer >>
  5. Which is better a cash dividend or a stock dividend?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center