Franked Investment Income: Definition & Overview

KEY TAKEAWAYS

• Franked investment income allows companies to receive tax-free distributions on dividend income.
• 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 of dividends from one resident company to another. This type of income is commonly tax-free to the recipient company. FII was introduced with the aim of helping to avoid the double taxation of corporate income.

Types of Franked Dividends

There are two types of franked dividends:

• Fully franked
• Partially franked

When the dividends fully franked, the distributing company will pay tax on the entire amount. 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 that claim tax deductions that result in a net loss will often pay partially franked dividends. This treatment will circumvent a tax payment that’s too low. 

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.

How Is Franked Investment Income Calculated?

Franked investment income is calculated by recording how much tax has been paid on the distributed dividends. 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 that shareholders receive with dividend payments. A number of countries allow franking credits as a way to reduce the chances of double taxation or eliminate it altogether.

Summary

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

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.