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.