Ever heard the term ‘franking credit’? If you’re like most people you’ve heard the term but have no idea what it means.
A franking credit is a ‘tax credit’ provided to investors by some Australian companies when they pay a dividend.
The tax credit is equal to the amount of tax the company has already paid on the dividend before distributing it to the investor. Companies generally pay 30% tax.
Once investors receive a dividend they too have to pay tax on it. But they can use the franking credit provided by the company to offset some or all of their tax.
In effect, if an investor has a tax rate of 30%, they will pay no tax on the dividend as the franking credit is also equivalent to 30%. If the investor has a tax rate of 38%, they will pay 8% tax on the dividend and so on.
Therefore, franking credits effectively increase the after tax return of dividends for investors.
Franking credits are unique to Australian shares, no other asset class provides such favourable tax treatment on income for investors.
To find out more about franking credits and how they affect you, contact Financial Planning Expert on 03 9708 8126.
ABN: 71 545 756 841 Australian Financial Services License: 402042
Phone: (03) 9708 8126
