Franked Investment Income Explained in 2025: How It Works & Types with Tax Benefits

Julia Kagan is a financial and consumer journalist, formerly senior editor of personal finance at ZAMONA.

What Is Franked Investment Income in 2024?

Franked investment income (FII) refers to dividends or distributions received by one company from another, where the distributing company has already paid corporate income tax on those profits. This system prevents the same income from being taxed twice, a common issue in many tax jurisdictions.

Key Insights

• Franked investment income allows companies to receive dividends without incurring additional tax liabilities.
• It includes attached tax credits that reduce the tax burden on dividend recipients.
• This approach is widely used in Australia, New Zealand, and parts of Europe to prevent double taxation.

How Franked Investment Income Works

When a company earns profit, it pays corporate tax on those earnings before distributing dividends. The dividends paid out, termed franked dividends, carry imputation credits representing the tax already paid. When shareholders or receiving companies receive these dividends, they can claim these credits, thereby reducing or eliminating further tax obligations on the dividend income.

This mechanism ensures that income is taxed only once at the corporate level, making it an efficient tax system for investors and companies alike. The dividend recipient 'grosses up' the dividend by adding the imputation credit to calculate the total taxable amount and then subtracts the credit from any tax owed.

Quick Fact

For example, in New Zealand, companies provide 28 cents of imputation credits per 72 cents of dividends. Shareholders taxed at 28% or below pay no additional tax, while those with higher rates pay the difference.

Types of Franked Investment Income

There are two main types of franked dividends:

Fully Franked Dividends

These dividends come with 100% tax credits as the company has paid the full corporate tax on the distributed profits. Investors can fully utilize these credits to offset their tax liabilities.

Partially Franked Dividends

When companies have tax deductions or losses carried forward, they may pay less than full corporate tax. Dividends paid under these conditions carry partial tax credits, meaning investors must pay tax on the unfranked portion.

Note:

The original income from which the dividends derive is known as the franked payment.

Example Scenario

Imagine ABC Company earns a profit and pays corporate tax accordingly. When it distributes dividends as franked investment income to XYZ Company, XYZ is not taxed again because the tax was already paid by ABC. This credit system effectively attributes the tax paid by ABC to XYZ.

How Tax Authorities Track Franked Investment Income

Tax agencies monitor franked income distribution via imputation or franking credits attached to dividends. These credits certify that tax has already been paid at the corporate level, allowing the recipient to reduce or avoid double taxation.

Franked vs. Unfranked Income

Franked income includes tax credits to prevent double taxation, whereas unfranked income doesn’t carry such credits, causing recipients to pay tax on the dividends received.

Are Dividends Earned Income?

No, dividends are classified as unearned income because they do not arise from active employment but from investments. Earned income refers to wages, salaries, and tips earned through work.

Summary

Franked investment income is a tax-efficient way companies and investors handle dividend income by utilizing prior corporate tax payments to avoid double taxation. This system benefits shareholders in countries utilizing dividend imputation, including Australia, New Zealand, and certain European nations, ensuring dividends are taxed fairly and efficiently.

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