What's all the Fuss about Franking Credits
Wednesday, March 21, 2018
In the Australian share market there is the option of investing in ‘imputation funds’ that provide 'franked dividends'. This means the investor, who owns shares in the company, not only receives the dividend, but also receives the added benefit of claiming what are known as franking credits when completing their tax return.
Before the dividend imputation system was introduced in 1987 by the Hawke/Keating government the tax office would tax both the company, and the investor who received the dividend - in effect a form of double taxation.
We now have overcome double taxation of company profits through “dividend imputation.” Under this system, the Australian Tax Office recognises that corporate tax has already been paid on profits distributed to investors as dividends. This already-paid tax can be transferred to investors using ‘franking credits’, reducing their tax liability.
So in the Australian share market there is the option of investing in ‘imputation funds’ that provide these franked dividends. This means the investor who owns shares in the company receives the dividend plus they have the added benefit of claiming what are known as franking credits when completing their tax return.
Example: You hold 625 shares in ABC Company for which you paid $16 per share making the total investment in this company $10,000.
ABC Company makes $3 of profit per share and is required to pay 30% tax on that profit which is 90 cents, leaving $2.10 cents per share able to be either retained by the business for growth or paid out to you and other shareholders in the form of a dividend.
ABC Company decide to retain about 40% of the profits to further grow the business and to pay shareholders the remaining $1.20 as a fully franked dividend. Attached to this dividend is a 30% imputation credit which you don’t physically receive but which you have to both declare in your tax return as income and claim back as tax rebate.
Dividends are treated by the tax office the same as other income and are grouped together with your other earnings to determine an overall taxable income amount. Typically, franking credits are of most value for investors on the lowest tax rates. For tax-free investors they’re as good as cash. Therefore the value to you depends on your marginal tax rate. So the recent myth of withdrawing these benefits from tax payers only impacting high income earners is just that – a myth. Franking credits benefit a full spectrum of investors throughout Australia but mostly benefit those on low or no tax positions.
There are some rules that apply so best to speak with your financial adviser to position yourself for all the benefits of a portfolio including franked dividends.
For more Information contact Mark Digby at Maher Digby Securities Pty Ltd - Financial Advisers – AFSL No. 230559 (see advert Page 3). Ph: 07 5441 1266 or visit our website www.maherdigby.com.au This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such. Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor