Franked dividends were conceptualised as a means to reduce the tax and financial burden of the receiver of profits from an investment. Since their inception into the financial industry, they have been the focal point of a number of high-profile discussions among the country’s political and business leaders for their utility and relevance.
Knowing what we know about franked dividends, it can be a little confusing as to why they are so contentious, after all, the credits generated alleviate double-taxation for investors of all sizes – from the everyday to the business elite – it should go without saying that there can be mismanagement or morally divisive situations presented with franked dividends.
While these issues exist, we cannot underestimate the true and prudent nature of franked dividends as being a lucrative and often misunderstood concept and asset in the world of shares and stocks. This article will unveil a little of the intrigue and mystery of the concept of franked dividends, and hopefully shed a little light on how everyone stands to benefit from them, with the right strategies.
Defining Franked Dividends
Let’s boil it down to brass tacks – franked dividends are taxed stipends made by a profiting company to an investor. As profits are taxable, most companies elect to pay the taxes before giving it to investors. For investors however, the receiving of the money counts as taxable income as well – you may be thinking, “doesn’t that mean double the tax is paid?” to which the answer is, Yes.
To combat this double taxation, the notion of tax credits was introduced to alleviate this particular worry and to entice further growth and investment in the growing marketplace. Franked dividends are the associative term for payouts to investors that will carry this credit, which will signify a lucrative opportunity for the investors who seek out companies that payout in this manner.
The Controversy Behind Them
If it means saving money when tax time rolls around, where’s the controversy coming from? There are a lot of people spouting hearsay here and there regarding the practice. Tax law and processes are often a little convoluted and boring on purpose, after all, the tax office wants every dollar they can scrounge from the taxpayer and the less we all know about the potential yields that can come about, the better for them.
The controversy stems from the actual legalities surrounding franked dividends and the subsequential credits that come about as a result. Australia is quite generous when you consider some of the additional benefits an investor can receive using the concept. For instance, if an associated tax credit from a payout is unused or not necessary for a taxpayer at tax time, the Government will simply reimburse the credit value in cash.
This type of practice was at the precipice of all the electoral controversy a few years ago wherein both sides of government were at odds about tightening up some loopholes that were allowing the more affluent members of our society to profit big time at tax time.
How To Get Started
While the use of franked dividends will forever be a controversial subject with the current regulations and benefits being what they are, there are a few ways you can get started with simple and wise investments.
You may not see gigantic windfalls of money like the top 10% of earners do with franked dividends, but you’ll certainly get a taste and understand why so many of the top earning investors utilise them wisely. Having a look at the larger companies that practice these payouts will give you a good idea of where is best to start.