What are Franking Credits?

So often I hear people ask, ‘What are franking credits?‘ – there is a lot of mumbo jumbo and jargon used in share market investing that this is quite a normal question. WELL! Todays article is meant to give insight into what Franking Credits are and why they are useful.

This article will now go on to help you understand franking credits and give insight into the tax benefits of franking credits from Australian Equities investing.

Franking Credits

It all starts with a dividend. A dividend is the profit a company makes that is then paid on to shareholders. This is normally paid two times a year, in the interim period and final period. Companies do not have to pay a dividend, they can choose to reinvest the profits in research or business structure (which can be a good thing). Some return profit to shareholders in the form of dividends as a form of income oriented investment.

You will recieved a dividend cheque in the mail if you are eligible and it will give you a share of the companies profit according to how many shares you hold. When you recieved a Franked dividend, you are recieving a payment that has already been taxed.

In your dividend statement you will receive details of how much of your dividend is franked and how much isn’t.

Take this example for instance;

• In an example borrowed from the ATO, Bill receives a dividend statement from Company A that details an unfranked dividend of $200, a franked dividend of $700 and a franking credit of $300. Bill’s total assessable dividend income is $1200 ($200+$700+300). If Bill earns a salary of $40,000 a year, and his dividend income is his only other income received, then his total taxable income is $40,000 + $1,200 = $41,200. At 2006-07 income tax rates Bill’s tax on that income would be $7,710 but that is offset by his $300 franking credit, reducing his final tax payable for the year to $7,410.

How do you claim your dividends?

You do not have to claim your dividend as a cheque/cash – some companies offer the option of participating in a ‘dividend re-investment plan‘ . Dividend re-investment schemes can help you make good money in the long term, as you will slowly acquire a larger holding of shares which will become more valuable (thats if you are holding onto solid Blue Chip shares).
For example, $100 invested in the All Ordinaries index in 1900, due to the magic of compounding, would have grown to more than $60,000 today. But if you’d reinvested your dividends, that amount would be more than $7 million. Worth a thought.

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