Franked Dividend

Franked Dividend

An arrangement in Australia that elimintates the double taxation of dividends. Dividends are dispersed with tax imputations attached to them. The shareholder is able to reduce the tax paid on the dividend by an amount equal to the tax imputation credits. Basically taxation of dividends has been partially paid by the company issuing the dividend.

Notes:

This concept is best illustrated by an example. Suppose you receive a franked dividend of $100. Assume the before tax value of this dividend was $125 (this will depend on the company's rate of taxation). That is to say that the company had to generate $125 of pre-tax profit to be able to disperse the dividend. Assume your marginal tax rate is 30%. Therefore you will owe $12.50 in taxes on the franked dividend (($100) -($125 * (1-.3))= $12.5). If the dividend were unfranked, you would owe $30 on the $100 dividend ($100 * (1-.7)= $30. Essentially the company has paid a portion of the tax that you would owe if the dividend were unfranked. In Australia taxes of this sort are paid to the Australian Tax Office (ATO).

See also: Cum Dividend, Declaration Date, Dividend, Dividend Imputations, Dividend Payout Ratio, Double Taxing, Ex-Date, Ex-Dividend, Payment Date, Record date