Dividends paid by companies to their shareholders can be either franked or unfranked, and they can also be accompanied by franking credits.
Franked dividends are those that have already had tax paid on the underlying profits of the company. This means that the shareholder receiving the dividend is entitled to a franking credit, which represents the tax already paid by the company on those profits. The franking credit can be used to offset the shareholder’s own tax liability. For example, if a shareholder receives a franked dividend of $1,000 with a franking credit of $429, they will only be taxed on $571 of the dividend (i.e., $1,000 – $429), as the franking credit is used to offset the tax liability on the remaining amount.
On the other hand, unfranked dividends are those that have not had any tax paid on the underlying profits of the company. As such, no franking credit is available to the shareholder. The shareholder is taxed on the entire amount of the dividend received. For example, if a shareholder receives an unfranked dividend of $1,000, they will be taxed on the full $1,000 amount.
Understanding the difference between these types of dividends and their associated franking credits is crucial for anyone receiving income from shares.
If you receive dividends and require more assistance on this matter, please contact our office at 03 9973 5905.