WHat is a franked dividend?

A franked dividend is a dividend paid by a company that includes a tax credit, known as a franking credit, which reduces the tax liability of the investor receiving the dividend. This system is designed to eliminate double taxation of dividends, where a company pays tax on the dividends it distributes, and the investor also pays tax on the same income, resulting in double taxation. The franking credit allows the investor to offset the tax paid by the company, effectively reducing the investor's tax burden on the dividend income.

1. **Fully Franked Dividends**: When a company pays a fully franked dividend, it means the company has paid tax on the entire dividend amount, and the investor receives a tax credit equal to the tax paid by the company. This results in the investor not having to pay any additional tax on the dividend.
2. **Partially Franked Dividends**: If a company pays a partially franked dividend, it means the company has paid tax on only a portion of the dividend amount. The investor receives a tax credit for the tax paid by the company, but still owes tax on the unfranked portion of the dividend.

Franked dividends are particularly beneficial in Australia, where the imputation credit system is in place to avoid double taxation of dividends. The effectiveness of franked dividends depends on the investor's marginal tax rate and the tax rate of the company issuing the dividend.