Franking Credits Offer a Boost to Retirement Investment Income

Wednesday, September 13, 2023

It’s that time of year when many retirees are in the process of receiving retirement investment franking credit rebates. Franking credits are attractive to self-funded retirees because they allow them to generate additional income from their share portfolios.

What are Franking Credits? 

Franking Credits are in essence a tax rebate for investors who hold shares in Australian companies. As the company they have invested in has already paid tax on its profits, the idea is that the shareholder should not have to pay tax twice on its dividends.

When a company earns a profit, it pays corporate income tax on those profits. After this tax, they then distribute dividends to their shareholders. In this way, the investor has already paid tax on the income they received from the company. If the company has paid this tax, then the dividends will carry a franking credit, which consists of the amount of tax already paid by the company.

Subsequently, if an investors marginal tax rate is lower than the corporate tax rate, they may be entitled to a refund of the excess franking credits or have their tax liability reduced.

Receiving Franking Credits 

In the past those retirees who do not need to lodge a tax return, were required to complete a Franking Credit claim form submitted to the ATO (Australian Taxation Office) in order to receive a refund to their bank account.

Over the last few of years, the process has become increasingly automated by the ATO. They already know most of the information because it has been reported to them by financial institutions. However, this information may sometimes not be across to the ATO until August/ September. Once reported, the information should be visible via the MyGov Taxation portal system.

It could be wise to check the details as you may still require a manual form to be submitted in order to claim the rebate.

For those investors who are required to pay tax, the franking credit information is automatically incorporated in your tax return, if you are using the My Gov system to generate this. For complicated tax returns your accountant would manage this.  

In regard to superannuation investments, some managed fund wrap administrators claim and rebate the franking credits on your behalf within your superannuation investments. This results in a tax rebate being credited to your superannuation.                          

Three Tax Benefits of Franking Credits

1. Additional Income

If the franking credits exceed your tax liability, you may be eligible for a cash refund from the government. This means you receive money back, providing additional income.

2. Reduce Taxes

Franking credits are a tax offset which reduces the amount of income tax payable. In other words, they are used to offset your individual tax liability, resulting in a lower overall tax bill or increased refund. It means the taxpayer gets to keep more of their income, which is why they are popular among those who can take advantage of them.

3. Increased Returns on Investments

Shares in Australian companies that pay dividends with franking credits boost your investment returns. The franking credits represent tax already paid by the company, so you effectively receive a higher after-tax dividend.

Contact our Financial Advisors for Retirement Income Franking Credit Advice 

Having access to the benefits of franking credits within your retirement investment plan is just one benefit of an intelligent retirement investment strategy. This can be a complex area to comprehend. Maher Digby Securities are specialists in retirement planning and offer a range of services to meet your retirement income goals. Contact us for a complimentary initial discussion on 5441 1266.

For more Information contact Mark Digby at Maher Digby Securities Pty Ltd - Financial Advisors – AFSL No. 230559. 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 for retirement income franking credit advice.