Franked

What Does “Franked” Mean in Accounting?

In accounting, “franked” refers to dividends that have already had corporate tax paid on them and are distributed to shareholders along with a tax credit. This typically occurs in jurisdictions where corporate profits are taxed at the company level, and a tax credit is provided to shareholders to prevent double taxation on dividends. The tax credit received by shareholders represents the corporate tax already paid by the company.

Examples of Franked Dividends

1. Franked Dividends in Australia: In Australia, companies pay tax on their profits at a corporate tax rate before distributing dividends. When dividends are distributed to shareholders, they come with a “franking credit” which represents the tax already paid by the company. Shareholders can use this credit to offset their own tax liabilities.

2. Franked vs. Unfranked Dividends: Consider a company that distributes $70 as a dividend. If the corporate tax rate is 30%, the company would have paid $30 in taxes for every $100 of profit, leaving $70 to be distributed. Here, the dividend is franked, and shareholders would get a franking credit of $30.

Frequently Asked Questions (FAQs)

Q1: What are franking credits?

• A1: Franking credits, also known as imputation credits, are a tax credit that shareholders receive with franked dividends, representing the tax already paid by the company on its profits.

Q2: How do franking credits benefit shareholders?

• A2: Franking credits can be used by shareholders to reduce their taxable income, thus minimizing double taxation on dividends received from a company that has already taxed its profits.

Q3: Can shareholders receive a refund for excess franking credits?

• A3: In some jurisdictions, if the franking credits exceed the shareholder’s tax liability, they may be eligible for a refund of the excess amount.

Q4: Are all dividends franked?

• A4: No, not all dividends are franked. Unfranked dividends are distributed without any tax credits, meaning they may be subject to full taxation at the shareholder level.

Related Terms

1. Imputation System: The tax system that allows franking credits to be used to offset shareholders’ tax liabilities on their dividends.
2. Unfranked Dividends: Dividends distributed without any franking credits and are often fully taxable at the shareholder’s tax rate.
3. Dividend Distribution: The payout of a portion of a company’s earnings to its shareholders, which can be either franked or unfranked.
4. Corporate Tax: The tax imposed on a company’s profit before dividends are distributed.

Online References

• Australian Taxation Office: Franking Credits
• Investopedia: Franked Dividends

Suggested Books for Further Study

1. Financial Accounting Theory by William Scott: This book provides an in-depth look at financial accounting principles, including taxation and shareholder dividends.
2. Intermediate Accounting by Kieso, Weygandt, and Warfield: A comprehensive textbook covering various accounting topics, including corporate tax and income distribution.
3. Australia Master Tax Guide by CCH Australia: A detailed guide to the Australian tax system, including explanations of franking credits.

Accounting Basics: “Franked” Fundamentals Quiz

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