Unfranked investment income refers to investment income received without any imputation credits (also known as franking credits). Understanding this concept is important for Australian taxpayers as it impacts how investment income is taxed.
Essentially, when a company pays dividends, it might also attach franking credits. These credits represent tax the company has already paid on the profits that generated the dividends. Franked dividends come with these credits. Unfranked dividends, on the other hand, are paid out of profits where the company hasn’t paid, or hasn’t fully paid, Australian company tax.
Examples of unfranked investment income include:
- Interest earned on bank accounts or term deposits: Banks don’t pay dividends in the traditional sense, so interest paid is considered unfranked.
- Distributions from property trusts: Depending on the trust’s structure and the nature of its income, distributions may be partially or fully unfranked.
- Distributions from unlisted managed funds: Similar to property trusts, the franking status of distributions depends on the investments held within the fund and the tax paid by the fund on its earnings.
- Certain foreign dividends: Dividends received from companies incorporated outside of Australia typically don’t come with franking credits.
- Dividends from small companies that haven’t paid company tax: If a company has losses carried forward or qualifies for small business tax concessions, it might not have paid tax on its profits, resulting in unfranked dividends.
The tax treatment of unfranked investment income is straightforward. It is simply added to your assessable income and taxed at your marginal tax rate. There are no franking credits to claim to reduce the tax liability.
It’s crucial to keep accurate records of all investment income received, including details about its franking status. This information is needed when preparing your annual tax return. Failure to declare all investment income can result in penalties from the Australian Taxation Office (ATO).
While unfranked income might seem less desirable than franked income because it lacks the tax benefit of franking credits, it’s important to consider the overall investment return and diversification benefits. Focusing solely on franked dividends might limit investment opportunities and potentially lower overall returns. A well-rounded investment portfolio should consider various asset classes and income streams, including those that generate unfranked income.
Understanding the differences between franked and unfranked investment income allows you to make informed investment decisions and correctly report your income for tax purposes. If you’re unsure about the tax implications of your investment income, seeking advice from a qualified tax professional or financial advisor is recommended.
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