Franked Dividend

Here at Shmoop, we don’t let Frank do too much. He’s the kind of guy who always jams the copier or always spills coffee all over the important contracts. Anything goes wrong, we say it got “franked.”

Luckily for you dividend recipients, our Frank has nothing to do with a franked dividend. Instead, it’s a tax policy meant to prevent dividends from getting taxed twice. (Most prominently in place in Australia.)

A company earns a profit for the year. It wants to return some of the profit to its shareholders. So, it wants to issue a dividend. Meanwhile, the company’s profits are taxed. Once it pays its tax bill, it uses its remaining after-tax profits to pay for the dividend. Without the franked policy, the shareholders would then get taxed on the dividend they receive. Double taxation. The pot of money that makes up the company’s profits are taxed once as corporate tax, and then again when those funds get sent out as dividends.

Governments with franked dividends (like in Australia) want to avoid this. So they have the franked dividend policy. In this structure, the tax rate of the company paying the dividend helps inform the dividend tax paid by the shareholders who receive them. The government keeps in mind the taxes already paid on the money when determining the tax rate for the shareholders receiving the dividend.