There have always been rumblings on fully franked dividends and the impact they have on the Australian investment industry as a whole. Ever since the imputation credit system came into effect, there have been debates and public trials surrounding all aspects of the practice.
Tax specialists, accountants, advisers and experts have all thrown their hats into the ring on multiple occasions to discuss the merits and rules set in place for fully franked dividends and in what direction the system should be steering the at-times controversial practice. There are some caveats that may impact the ability of a company to pay fully franked dividends to investors, similarly there are many situations that allow certain companies to get out of paying fully franked dividends, or a lessened rate.
There are many variables that contribute to decision-making for companies on whether they will pay fully franked dividends or not – some for good and others for ill. While we are not in the business of casting a vote in one direction or the other, we will still be breaking down the commonalities and debates that circle fully franked dividends and the Australian financial system as a whole.
A Quick Definitive
Essentially, fully franked dividends and imputation credits are related to payments made to investors from companies when having a positive yield year in profits. This payment to investors is one of the reasons the market is so competitive and ongoing with popularity in the investment community. As the tax system is setup at the moment, there are taxes that need to be paid on these payments to investors.
Oftentimes the company will cover this tax payment before giving it to investors, fully franked dividends reflect this payment has had its tax paid for already. To avoid double taxation for investors, companies that pay fully franked dividends will then attach a credit on the payment, effectively informing the ATO that the appropriate level of tax has already been paid which reduces the financial burden on the investors who reap the reward.
There are instances where taxes are not paid for one reason or another, this will be reflected for the investor when tax season arrives, and payments will need to be made on the income generated.
To Pay Or Not To Pay
With such a lucrative and convenient way of rewarding investors and keeping overpayments from occurring available, why is it that some companies opt to not pay fully franked dividends to investors? Well, there’s many answers to this question – all of which are determinable through a case-by-case analysis.
Some companies elect not to pay fully franked dividends due to the simple notion that they are not headquartered in Australia and therefore are not obliged to pay certain levels of tax so choose not to take advantage of the system. Some other companies are slightly different and have caused some controversy by taking a little more from the taxation table – but that’s an article for another day.
Other companies will choose to not payout their investors at all for a more economical reason – particularly if they are a fledgling business that is on the way up. While there are some advantages to the imputation credit system, other companies are electing to not payout so early on a good year and instead put these profits towards excelling the business a little more.
This typically garners a positive reception from savvy investors as there is room to grow for the company, and anyone who is investing into their own concept should be rewarded instead of punished.
There’ll always be debates, the only way to find a conclusion is to research a little for yourself and make your own call on the subject.