Franking Credit

What is a 'Franking Credit'

A type of tax credit found in countries such as Australia that allows domestic companies to pass through taxes that have already been paid on corporate profits. The investor receiving stock dividends will also receive a quantity of franking credits in proportion to the overall tax rate of the company per dollar in profits.

When filing personal income taxes, the investor will record as income both the amount of the dividend and the amount of the franking credit; however, the franking credits can be deducted from the total tax due. If the investor has franking credits remaining and no more income tax due, franking credits can be returned as a tax refund to the investor.

BREAKING DOWN 'Franking Credit'

Franking credits are a type of dividend imputation and a way to reduce or eliminate the double taxation of dividends that occurs in many advanced economies. Franking credits are also calculated for mutual funds that hold Australian-based companies, which are then passed through to investors at year end. This program is relatively new (instituted in 1987) and its effects are watched closely by those who would wish to see a similar system in the United States and other nations.

For the larger, blue-chip companies operating in Australia, the franking credit is a great way to promote long-term equity ownership and has led to increases in dividend payouts to investors.

RELATED TERMS
  1. Franked Income

    After-tax investment income that is distributed by one U.K. company ...
  2. Franked Dividend

    An arrangement in Australia that eliminates the double taxation ...
  3. American Opportunity Tax Credit

    A tax credit that enabled more student and parents to pay for ...
  4. Business Tax Credits

    A number of federal income tax credits available to businesses ...
  5. Non-Refundable Tax Credit

    A tax credit that can't reduce the amount of tax owed to less ...
  6. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
Related Articles
  1. Financial Advisor

    Will You Pay Taxes During Retirement?

    Income taxes are one of the things that's certain in life. We'll explain the different tax situations when you retire.
  2. Personal Finance

    5 Tax Credits You Shouldn't Miss

    If you're not taking advantage of these deductions, you could be missing out on tax savings.
  3. Personal Finance

    Tax Credits That Can Get You a Refund

    Here are a few of the credits that may result in a refund check, even if you owe no taxes this year.
  4. Personal Finance

    Top Tax Refunds For Recent Grads

    Don't miss out on these tax credits if you have recently graduated.
  5. Managing Wealth

    3 Ways To Avoid The Dividend Tax Hike

    Find out how you can offset the potential tax hikes.
  6. Personal Finance

    Get A Tax Credit For Your Foreign Investments

    The foreign tax credit provides a break on investment income made and taxed in a foreign country.
  7. Markets

    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.
  8. Personal Finance

    Understanding Taxation Of Foreign Investments

    Technically, any gains from foreign investments owned by an American citizen are subject to tax by the company's home country as well as the IRS. However, the Foreign Tax Credit enables you to ...
  9. Personal Finance

    How Are Capital Gains And Dividends Taxed Differently?

    Individuals in the 25% or higher tax bracket pay a 20% tax on long-term capital gains.
  10. Personal Finance

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
RELATED FAQS
  1. What is the difference between a write-off and a deduction?

    Understand the differences between a tax write-off and a tax deduction. Learn how each one works to reduce income taxes and ... Read Answer >>
  2. 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 >>
  3. Is it possible to have a credit limit that's too high?

    Avoid these pitfalls when working with high credit limits, and learn how to increase your credit score by increasing your ... Read Answer >>
  4. What is the difference between bad credit and no credit?

    The answer to this question will depend on what information (if any) is found on your credit report, such as any bankruptcy ... Read Answer >>
  5. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  6. Do I need to file an income tax return every year?

    Understand if a person needs to file a tax return every year. Learn the benefits of filing a yearly income tax return even ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center