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Tax Avoidance

  1. Double Irish Dutch Sandwich
  2. Earnings Stripping
  3. Franked Investment Income
  4. Tax Avoidance
  5. Tax Efficiency
  6. Tax Shield
  7. Lien
  8. Tax Umbrella
  9. Homestead Exemption

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Franked Investment Income: Definition & Overview

Updated: November 25, 2022

Double taxation is a common issue that businesses all over the world deal with. This is when companies pay income taxes twice on the same source of income.

In certain countries, businesses can make use of franked investment income to help avoid this issue.

Read on to learn more about this type of income.

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    KEY TAKEAWAYS

    • Franked investment income allows companies to receive tax-free distributions. This is only on certain incomes.
    • The main aim of FII is to avoid double taxation. 
    • This means that companies can avoid paying income taxes twice on the same source of income.

    What Is Franked Investment Income?

    Franked investment income (FII) is income received as a tax-free distribution. This is by one company from another. This type of income is commonly tax-free to the recipient company. It is usually distributed in the form of dividend income. FII was introduced with the aim of helping to avoid the double taxation of corporate income. 

    Turn Tax Pains Into Tax Gains

    Types of Franked Dividends

    There are two types of franked dividends:

    • Fully franked
    • Partially franked

    When the shares of a stock are fully franked, the company will pay tax on the entire dividend. The investors will receive 100% of the tax that is paid on the dividend as franking credits. On the other hand, shares that aren’t fully franked can result in tax payments for investors. 

    Businesses will often claim tax deductions for a variety of reasons. This allows them to avoid paying the entire tax rate on their profits for any given year. When this occurs, the business in question doesn’t pay enough tax to legally attach a full tax credit to the shareholder dividends. 

    As a result of this, a tax credit is only attached to part of the dividend, making that part franked. The rest of the dividend remains unfranked, which is said to be partially franked. 

    In this scenario, the investor is responsible for the remaining tax balance. 

    It's Time For Owners To Own Tax Season

    How Is Franked Investment Income Calculated?

    Franked investment income is calculated by recording how much of a tax has been paid. If it is fully paid, then it will be known as fully franked. This means that the tax has been paid off in its entirety. 

    If something is only partially franked, then there is still a tax amount outstanding that has yet to be paid. In order for this to become franked, the remaining amount must be paid. 

    Benefit of Franked Investment Income

    Companies can receive tax-free dividends on a portion of their profits thanks to franked investment income (FII), which prevents double taxation. A franked dividend is one that comes with a tax credit that lowers the tax liability of the investor receiving it. 

    This brings a number of benefits with it, including the fact that it helps businesses to avoid double taxation – which is a common issue for a number of companies across the world. 

    What Are Franking Credits?

    A franking credit is a type of tax credit. It is paid by corporations to their shareholders with their dividend payments. A number of countries allow franking credits as a way to reduce the chances of double taxation or eliminate it altogether. 

    Summary

    Despite the elimination of ACT, the idea of franked investment income still exists in order to lessen the amount of shadow ACT that a corporation is seen to be paying and to expedite the recovery of surplus ACT beyond this date.

    By reducing double taxation, companies can see better tax profits and only pay their fair share of tax.

    Less Taxin'. More Relaxin'

    FAQS on Franked Investment Income

    Is Franked Dividend Taxable?

    Yes, franking dividends are taxable. According to the system’s foundation, you may be eligible for a franking tax offset for the tax the firm has paid on its profits if it pays or credits you with franked dividends. The tax owed on the dividends will be fully or partially covered by the franking tax offset.

    Do Franking Credits Count as Income?

    An investor who receives a franking credit normally records both the amount of the dividend and the amount of the franking credit as income when filing personal income taxes.

    What Is the Benefit of Franked Dividend?

    Having a franked dividend helps to reduce or eliminate double taxation.

    What Does Franked Income Mean?

    Franked income is any income received that has a tax credit attached to it.

    Is It Better to Have Franked or Unfranked Dividends?

    It is better to have franked credits. This is because unfranked credits carry no tax credit.

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