A considerable number of Australian citizens own shares and listed securities on the ASX. But since the Covid-19 pandemic happened, the whole world stood still as the share markets experienced numerous tribulations. Thankfully, the country is picking up the pieces and getting back to its feet. In the like manner, the economic activity has also improved and experienced positive adjustments.
Investors are now directing their focus on the prospective sustainability franked dividends since the times are uncertain. However, it is worth noting that many shareholders don’t understand the concept and benefits of shares that pay. Fortunately, we are discussing more about franked dividends to help you, as an investor, invest better.
What Are These?
Before we get into franked dividends, it is essential to understand what these are. This term refers to a portion of the profits you get from your shares. Once you buy shares in listed companies, you become one of the owners of the said companies. So, when the companies make a profit, they pay you part of the earnings. It is usually a way to reward the shareholders for investing with them.
Paying this is usually exclusive to the board and often happens twice a year. For instance, when you buy shares at $1.00 per share and get 10 cents as a payout on every share, you will realize a 10% return from your earnings each year. While these types of shares are an ideal way to make an income, some investors choose to reinvest the profits to enhance their portfolio.
It is also essential to learn about the types before we get to franked dividends.
It is distributed before the organization determines the annual profits. Usually, the payout is issued during interim financial statements of a business, which occurs after six months of the financial year.
A final dividend is one that a business is only required to pay when the company reports its annual earnings.
This is usually higher than regular distributions earned by a business as payouts. When shares generate high revenues over a financial period, the company might pay a special payout to the investors.
However, it is worth noting that not all companies pay all the above to their shareholders. Some companies may even fail to pay any amount altogether.
The Relationship between Franked Dividends and Tax
Finally, to the long-awaited terms, franked dividends, what is it? It is the element that make these payouts more appealing to the investors in terms of tax advantages. Businesses attach credits to their payouts to represent the amount of already paid tax by the company in Australia.
Unlike in other countries, these payouts don’t undergo double taxation in Australia. Corporations distributing franked dividends pay tax on their earnings at a corporate rate of 30%. They then allocate the remaining amount to the shareholders. Therefore, the investor will get the deduction for the tax that has been paid by the company to fulfill their individual tax obligations.
The Hawke-Keating Labor Government came up with the concept of franked dividends to prevent double taxation. But before this, businesses would pay tax on the earnings, and when they reach the shareholder, they will also undergo individual taxation. It meant that the payouts were subjected to double taxation.
Corporations in Australia continue to pay corporate tax and post-tax payouts to their investors under the scheme of franked dividends. However, the tax amount the shareholders pay to achieve imputation depends on the post-tax amount paid.
Since payouts are issued on a revenue basis of 30% in Australia, the investors receive a refund on the incomes distributed as payouts. These are what we now call franked dividends. Franked dividends contain an imputation credit attached to reflect the amount of tax paid by the company.