Question

When shareholders receive fully-franked dividends, they

	a.	do not have to pay personal income tax.
	b.	are entitled to receive tax refunds.
	c.	avoid double dipping.
	d.	pay less personal income tax than the tax that the firm has paid.
	e.	None of the above.

Answer 1

Fully franked dividend means tax that has been paid by corporates on dividend distribution, full tax credit is allowed to shareholders on that dividend income. That tax credit can be used by shareholders to pay tax on dividend income.This is made due to avoid double dippling or double taxation on same amount of dividend.

For example, Company pay tax @30% of dividend distribution on $1000 dividend that is $300. That $300 tax credit can be used by shareholders to pay their personal tax on dividend income. Assume dividend is taxed @34%. So tax payable is $340. Now shareholders will only pay $340 -$300 = $40 as tax on dividend income. this avoid double taxation on same amount of dividend.

So correct answer is c, avoid double dipping.