Franked Investment Income: What it is and why it’s an important term for businesses

Partially Franked Dividends

Businesses have the ability to declare tax deductions, maybe because of the deficit from previous years. This gives them the opportunity to pay the net tax rate on their earnings for any given year. By doing this, a business is safe from contemplating full tax credits in terms of the dividends imbursed to shareowners. The outcome is the tax credit is included as the part of the dividend, making that part as franked. The remainder of the dividend is untaxed. This allowance can then be termed as partially franked. Now, the investor has the responsibility to imburse the remaining tax balance.

How are Tax Ruling Authorities notified about franked investment income ?

Tax ruling authorities are notified when a business provides franked investment income to get rid of double taxation. Tax authorities achieve this by the assistance of franking tax credits or imputed tax. Franking tax credits are disbursed by the dividend-paying corporations. Upon the application of this credit, the organization receiving the allowance is eligible to apply a tax credit for avoiding being taxed or minimize the existing tax burden.

Contrasting between franked and unfranked income

Franked and unfranked income can be categorized into two separate types of dividends that companies can provide to stakeholders and other firms. Franked income introduces tax credits that help the receiving party to get rid of double taxation. Unfranked income, however, doesn’t provide you with any tax credits. Therefore, the receiving party has to imburse tax every time for receiving allowances.

Are dividends contemplated as earned income

Dividends are considered as earnings that aren’t through regular employment. Therefore, it is considered as an unearned income. There are also other types of unearned incomes like inheritance, prize money, gifts, unemployment perks, etc.

To help clear your mind, earned income is the amount of funds earned by working for another entity. This type of income can be wages, tips and salaries. Earned income can also be acquired by a self-employed individual.

Understanding Franked Investment Income as an example

Let’s understand franked investment through an example of a company called KBC.

Consider that this company has proclaimed a profit for a quarterly period. Therefore, if the company KBC pays a franked investment income to another company called ABC, then this ABC company isn’t eligible to pay tax on this income. The reason for this is because this tax was evaluated on the company KBC before it was imbursed.

In short, the tax paid on this income is credited to the receiving party. Once the income providing company pays the corporate tax on the income issued, the tax payment is also credited to the company who is the recipient of franked dividend.

Conclusion

Dividends also termed as allowances provide the corporations the opportunity to allocate their profits with the shareholders. Usually, any entity that receives the allowances has to imburse taxes on this mode of unearned income. Franked investment income is a way for the allowance receiver entity to avoid getting taxed. Because the body providing dividends pays the tax on the profit before it is provided to the recipient.