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Are your franking credits working?
Here’s what you need to know about franking credits and how they work.
Are your franking credits working?
What are franking credits?
Franking credits are credits for taxes that a company has already paid on its profits at the 30 per cent corporate tax rate before distributing it as dividend payout.
Companies may then decide whether to use the tax credit or pass it on to shareholders by distributing fully franked or partially franked dividends.
The main difference between fully and partially franked dividends is how much of the company-paid taxes shareholders will benefit from. Fully franked dividends come with credits for the full 30 per cent, while partially franked dividends limit tax offsets for the franked portion of the dividends.
What franking credits can do for you
Franking credits may provide extra income or bring down your tax payable, but you may not feel its effects unless you have a significant investment in dividend-paying shares.
This is because the underlying company gets to decide the amount of dividend per share – some may give a few dollars, while others may give smaller amounts.
In this sense, shareholders who have a large number of dividend-paying shares in their portfolio may enjoy larger dividends compared with fund members.
Your franking tax offset
Dividends also form part of your income and must be included in the tax return in the financial year it was distributed and you may have to pay tax on them. However, the franking credits you receive from franked dividends may lower your tax obligation for the year.
Likewise, you may claim a cash refund if your marginal tax rate falls below 30 per cent.
Do franking credits affect superannuation?
Many super funds include dividend-paying shares in their portfolio, but fund members may not necessarily feel its effects – it all depends on how the fund manager utilises the credits.
Some fund managers and trustees simply pass on franking credits that are proportional to the units its members hold. However, some may use the credits to reduce the total tax that the fund pays then passes the dividends to members – it all depends on what was agreed upon.
Will franking credits be abolished?
The Labor Party’s proposal in the lead-up to the 2019 elections touched on franking credits but focused on abolishing cash refunds and not the imputation system as a whole.
However, the Labor Opposition’s election loss means that the government will continue to hand out cash refunds for taxpayers who claim their excess franking credits.
Despite this, investors may expect that cash refunds and the imputation system may be challenged again in the future, as it had been multiple times since it was passed.
Explore nestegg to learn more about franking credits and taxes.
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