Franked Dividend

An arrangement in Australia that eliminates the double taxation of pidends. Dividends are dispersed with tax imputations attached to them. The shareholder is able to reduce the tax paid on the pidend by an amount equal to the tax imputation credits. Basically, taxation of pidends has been partially paid by the company issuing the pidend.

This concept is best illustrated by an example. Suppose you receive a franked pidend of $100. Assume the before-tax value of this pidend is $125 (this will depend on the company's rate of taxation). In other words, the company has to generate $125 of p-tax profit to be able to disperse the pidend.

If your marginal tax rate is 30%, you will owe $12.50 in taxes on the franked pidend (($100) -($125 * (1-.3))= $12.5). If the pidend is unfranked, you will owe $30 on the $100 pidend ($100 * (1-.7)= $30. Essentially, the company pays a portion of the tax that you would owe if the pidend was unfranked. In Australia, these taxes are paid to the Australian Tax Office (ATO).