Franking Credit

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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. Capital Gains Treatment

    The specific taxes assessed on investment capital gains as determined ...
  2. Blue-Chip Stock

    Stock of a large, well-established and financially sound company ...
  3. Ordinary Income

    Income received that is taxed at the highest rates, or ordinary ...
  4. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
  5. Dividend Imputation

    An arrangement in Australia and several other countries that ...
  6. Double Taxation

    A taxation principle referring to income taxes that are paid ...
Related Articles
  1. How And Why Do Companies Pay Dividends?
    Investing Basics

    How And Why Do Companies Pay Dividends?

  2. Using Tax Lots: A Way To Minimize Taxes
    Taxes

    Using Tax Lots: A Way To Minimize Taxes

  3. What is the double taxation of dividends? ...
    Taxes

    What is the double taxation of dividends? ...

  4. Will ETFs Eventually Replace Mutual ...
    Mutual Funds & ETFs

    Will ETFs Eventually Replace Mutual ...

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center