If you plan to buy shares in Australia, you should probably know learn about Franked dividends. In this article, we will enlighten you about what you should note about them.
Before it was established, shareholders’ profit from stock/shares got taxed on company level and taxed again from the stakeholders. This is referred to as double taxation.
It was first established in Australia by the Howard-Costello Liberal Government in 1987. It eliminated the problem of double taxation in Australia. Other countries like Malta and New Zealand adopted the idea with time.
Here are the key things you should know about Franked dividends.
What Franked Dividends Mean
It is a type of imputation which aims at reducing the amount of tax collected from shareholders. You are no longer bothered about the double taxing imposed on your stock profits with this.
For instance, a company sells stock to you as a shareholder. You then get profits from the shares over time, usually monthly or yearly. These profits are referred to as dividends. But before those profits are disbursed, the company is expected to pay taxes.
After the company holding your stock is taxed, they pay you with credits. These credits offset your total income tax. So, instead of paying extra tax on the products, you get a reduction, or even a refund in some cases.
The Types Of Franked Dividends
They are of two types. They are:
- Fully Franked dividends: Just as we described earlier, your stock profits are paid alongside = credits. They are done to ease the issue of excess charge on your stock on return.
As far as the company you are investing with makes profits, you will be issued with this type.
- Unfranked dividends: They are also referred to as unfranked stock-on-return. Here, companies are not mandated to pay extra profits to shareholders. The company’s stock is not taxed at company level. Taxes are collected only at the shareholders’ level.
It usually means that the company didn’t make profits in that period.
Benefits Of Franked Dividends.
There a few benefits of this to investors. They include:
- Issue of double taxation solved
You are no longer bothered about your profits being taxed on two different levels. You are assured that a reasonable amount of stock-on-return will be coming to you at the end.
- Offsets the amount of taxes paid
It balances the individual income tax imposed on your profits after the company-level tax. It helps you invest more and, at the same time, increase economic efficiency.
- Brings stability to the stock market
These stock-on-return influence consumer choice. Not all firms issue them. So when firms do, it attracts shareholders to themselves. When you reinvest, you help the company grow. And this brings efficiency and stability to the stock market.
In Australia, not all companies issue Franked dividends. So it would be best if you considered looking out for those that do. You get comfortable knowing excess taxes do not eat up your investments. See you next time.