Franked dividends came into being as a result of double taxation. In time past, the tax authority collected tax on profits made by companies. In addition, they also collected tax on dividends paid to shareholders from the profits of the company.
Looking at it closely, you will discover that the tax authority has taxed the same money twice. This made companies and shareholders alike to take the matter seriously. Through the help of the government, a solution was brought up. This solution is known as franked dividends. Franked dividends has to do with the company paying tax on it’s profit and the shareholders who get dividends won’t have to pay another tax. This is because the company has already paid tax on the same money.
Benefits of Franked Dividends
There are many benefits or advantages of franked dividends. Let’s take a closer look at some of the benefits it has brought about.
The development of franked dividends ensured that taxes for a particular set or amount of money was paid for only once. The payment is mostly done by the company. However, in a situation where the shareholder has a higher tax rate than the company, the shareholder pays the difference.
This means that if a company pays a 10 percent tax on it’s profit, a shareholder who has a 15 percent personal tax rate will pay only 5 percent tax on the dividends he or she got from the company. In time past, he or she was required to pay the full 15 percent all over again.
On the other hand, if a shareholder has a personal tax rate of 5 percent and the company already paid their tax of 10 percent, the tax authority will return 5 percent to the individual. Previously, the individual would have been required to still pay his or her personal tax rate of 5 percent.
- It improves transparency
Franked dividends helps to improve transparency all round. Due to the reduced tax income, the tax authority has made sure that everyone’s tax rate is known to him or her. In addition, the companies are also made aware of their tax rate.
On the part of the company, they go ahead to publish their earnings before and after tax for her shareholders to see and even for the general public. In that way, everyone is able to do the calculations themselves and know the necessary deductions.
Transparency is good both for the growth of the business, the shareholders and also for the tax authority. Everyone can easily hold each other accountable. Unlike before, where the tax authority did all the accountability checks.
Franked dividends are a blessing to the shareholders especially. Some shareholders enjoy it more than others especially those who receive a percentage of tax returns.
Nonetheless, the other shareholder also receives a drop in the percentage he or she could have paid or even pays nothing. When an individual’s tax rate is the same with the company tax rate, he or she doesn’t pay anything from the dividends.