Question of the Week – to be frank

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Question: With the talk from Labor of removing the tax contribution for franked dividends to the investor, I would like to better understand franking credits and why companies pay them. Is it possible to request dividends to not be franked from companies?

Answer (By Paul Rickard):  Franking (or imputation) credits represent the tax that the company has already paid. The system of dividend imputation was introduced to prevent the double taxation of company profits – firstly with the company, and then in the hands of the shareholder when a dividend is paid. Effectively, dividend imputation ensures that profits are only taxed once.

Because imputation credits represent the tax the company has already paid, they are of no value to the company. They are only of any value to the shareholder, reducing the tax they would otherwise pay.

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