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 explained
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. This will allow you to understand what your franking credit is.
Take this example of a franking credits scenario:
- 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.
2 Responses for Franking Credits and How They Work
I have a self managed super fund in pension mode. I am considering investing in a perl a/c with commonwealth bank. 70% of its annual return is paid by divided and 30 % by franking credits. Are these franking credits of benefit to the fund when it is not paying tax [ in pension mode] ???
Thankd for your great help graham
I do in fact have an opinion on your question, but it would be irresponsible of me to offer advice without knowing more about your situation. I suggest seeing a free financial planner at Commonwealth bank – they have great staff and would love to help!