What Is Franked Investment Income?

The term franked investment income refers to a tax-free distribution received by one company from another. Franked investment income is typically distributed as a tax-free dividend to the receiving company while the issuer is taxed on the profits earned. This type of income was introduced to avoid the double taxation of corporate income. The term is most commonly used in Australia, New Zealand, and parts of Europe.

Understanding Franked Investment Income

Franked investment income is income distributed as dividends to a company from earnings on which corporate tax has already been paid by the distributing company. The goal is to avoid the 澳洲幸运5官方开奖结果体彩网:double taxation of dividends. Double taxation occurs when the issuing company and a sh💜areholder pay tax on t💙he same income.

The company pays taxes on profits and subsequently distributes a dividend out of its after-tax profits. Shareholders must then pay tax on the dividend received. Taxpayers in countries with franked investment income, which are mostly those in the Oceanic or European regions, typically claim the appropriate credit when filing their taxes through 澳洲幸运5官方开奖结果体彩网:dividend imputation.

To avoid double taxation, tax authorities are notified that a company already paid the required income tax on dividends paid to shareholders through imputed tax credits. The shareholder or receiving entity either doesn't pay or pays a reduced tax on the franked dividend income.

The dividend recipient grosses up the dividends by adding the imputed tax credits on the franked investment income to the amount of dividend received. The investment tax is applied to this sum to determine the gross tax liability. Finally, the imputed credit is subtracted from the 澳洲幸运5官方开奖结果体彩网:tax liability to derive the actual tax payable.

Types of Franked Investment Income

There are two different types of franked dividends. These ༺are 😼fully franked and partially franked dividends. We provide some key elements of both below.

Fully Franked Dividends

When a stock’s shares are fully franked, the company pays tax on the entire dividend. Investors receive 100% of the tax paid on the dividꩲend as franking credits. In contrast, shares that are not fully franked may💧 result in tax payments for investors.

Partially Franked Dividends

Businesses may claim 澳洲幸运5官方开奖结果体彩网:tax deductions, perhaps due to losses from preceding years. This allows them to avoid paying the entire tax rate on their profits in a given🥂 year. When this happens, the business does not pay enough tax to legally attach a full tax credit to the divi🔯dends paid to shareholders.

As a result, a tax credit is attached to part of the divide💞nd, making that portion franked. The rest of the dividend remains untaxed—or unfranked. This dividend is then said to be partially franked. The investor is responsible for paying the remaining tax balance.

Example of Franked Investment Income

Here's a hypothetical example to show how franked investment income works. Let's assume that ABC Company declared a profit during the current quarter. If ABC Company pays franked investment income to XYZ Company, XYZ Company isn't taxed on the income. This is because the tax was assessed on ABC Company before the income was paid.

In essence, the tax paid on this income is also attributed to the receiving firm. Once the issuing company pays corporate tax on the income being distributed, the tax payment is attributed also to the companies who receive the 澳洲幸运5官方开奖结果体彩网:franked dividend.

The Bottom Line

Dividends allow corporations to share their profits with their shareholders. In most cases, anyone who receives dividends must pay taxes on this form of unearned income. Franked investment income in certain countries allows the receiver of dividends to avoid being taxed. That's because the issuer pays taxes on the profit it earns before the dividends are issued. This is common in countries like Australia, New Zealand, and some European nations.