- The dividend income in Australia is taxable and an investor who receives dividends from a company is liable to pay tax on it.
- A franked dividend is a form of arrangement made by tax authorities as it solely aims to eliminate the problem of double taxation.
- When the dividend is paid with only a portion be franked, then it is called a partially franked dividend.
According to an estimate, more than one-third of the Australian population has either directly or indirectly invested in the stock market. A good chunk of these investors invest for the passive income in the form of dividends.
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Whenever a company makes profit, the management decides on whether to retain that profit for future expansion plans or to distribute among shareholders in the form of dividends. It can also do both in a well-calculated ratio to cater to both the requirement of the shareholders and the need in the future by the company.
Is dividend income taxable in Australia?
However, one aspect of dividend income that most investors are unaware of is its taxation. A lot of investors ask this question; do I need to pay tax on my dividend income? Well, the dividend income in Australia is taxable and an investor who receives dividends from a company is liable to pay tax on it to the government.
Also, the tax treatment of dividend income for a publicly listed company and a private company is the same, therefore an investor needs not jump between different tax treatments for his dividends from a private company or a publicly listed company.
What is a franked dividend?
As mentioned earlier, the dividends received are considered to be an income and therefore it is taxable. However, there is a catch to it. Dividends are only paid from the profits of the company and a company’s profits are also taxable under the corporate taxation.
Therefore, before distributing dividends off that profit, the company pays tax to the government, after which the leftover profit is considered to be distributed as dividends. This leads to the problem of double taxation as the dividends which are distributed by the company have already been taxed by the government, and the practice of investors again paying tax on this dividend income is needed to be avoided.
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This is where the feature of a franked dividend comes in. A franked dividend is a form of arrangement made by tax authorities that solely aims to eliminate the problem of double taxation. A franked dividend is essentially a dividend that comes attached with a tax credit. This tax credit is equal to the tax already paid by the company at corporate level, which helps to reduce the tax burden of the dividend-receiving investor.
The shareholder discloses the dividend and the franking credits as his income in his tax filings, but ends up being taxed on his dividend income only. Therefore, practically, an investor does not pay tax on his dividend income if it is fully franked, and this eliminates the problem of double taxation.
Read More: When does Westpac pay its dividends?
What are the types of franked dividend?
Broadly, there are two types of franked dividends, namely, fully franked and partially franked. When the company pays tax on the entire dividend that is being distributed to the shareholders and subsequently investors receive a 100% franking credit attached with their dividend, then it is said to a fully franked dividend. The shareholder does not face any liability to pay tax on their dividend income.
Sometimes due to losses from preceding years or for other valid reasons, the company claims tax deduction. This enables the company to legally avoid paying a portion of tax on their profits in the year in which tax dedications are claimed. In this scenario, where the dividends are distributed off the profit which are not fully taxed at corporate level, the company is not able to attach a full tax credit but only a position proportionate to the tax paid.
When the dividend is paid with only a portion be franked, then it is called a partially franked dividend. The position of the dividend which is not franked remains unfranked. In this case, the tax liability on the shareholder arises on the dividend income to the extent of unfranked portion.
How franked dividend is taxed?
Let’s assume a shareholder X has received a dividend of $100 from the shares of ABC company. According to the total taxable income of X, he comes in the tax bracket of 30%. Therefore, X is liable to pay a 30% tax on the dividend received.
However, at the corporate level, the company has already paid full tax on the profits, making its dividend to be fully franked. Here’s how the tax treatment of his dividend income would look like