The Benefits of Franked Dividends and Franking Credits

Franking of dividends is a major reason why investment in share trusts and direct shares makes so much sense. Under the tax scales for 2007/08 a person with total income of up to $80,000 will actually receive fully franked benefits tax free excluding the medicare levy.

When you consider that many companies pay fully franked dividends of around 4% or 5% this compares very favorably with current fixed interest returns which after tax are considerably lower than this. Shares carry more short term capital risk but on a long term basis have historically provided for superior income and capital growth returns than other asset classes in most time periods.

Australian shares in companies that pay tax at the 30% company rate, have $428.57 of attached franking credits for every $1,000 of dividends they pay out. These franking credits are basically a credit for tax already paid by the company. What is great about franking is that it can be used to reduce your tax liability and any excess franking credits are refunded to you. A shareholder on the 30% tax rate (which applies up to $80,000) can essentially receive these franked dividends tax free. A shareholder on the 15% marginal tax rate (which applies up to $30,000) will receive a refund of $215 for every $1,000 of fully franked dividends. This credit can also be used to offset the tax from any other income.

If you would like more information on franking or would like to speak to a financial planner to learn just how you could benefit from franked dividends simply follow this link: Enquiries and mention "Franking Credits".

Source: Personal Wealth

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