Franking Credits Explained
Franking credits are a subject that is generally very confusing for most investors.
Australia has a complicated tax system. A few years back it was decided that to ensure investors don’t pay tax twice they would receive a credit for any tax a company had already paid. Sounds fair?
This is called “franking” or a “dividend imputation system”!!! (Nice and simple!)
So, when a company lodges its tax return, it is able to account for this tax in a “franking account”.
When a dividend is declared, the dividend can be fully or partially franked (or not at all) depending on the amount of tax the company has paid.
So – you are an investor and for whatever reason you are not paying tax (for example you receive a superannuation fund income stream).
The dividend from the company is received, and the company paid its tax at 30%, so you get a credit for that 30%. Because you don’t have tax to pay, you now get a refund for the tax.
The system was introduced to ensure that you don’t pay the tax twice. I.e., the company has already paid the tax.
There is a lot of debate about the impact of any changes to the franking systems.
Changing any tax legislation is difficult. Some would say it’s unfair and some would say it’s fair. Governments change and policies change, (probably too much) but investment markets wade through this information globally every day and adjust.
It’s something we can’t control. Some suggest making widespread changes to portfolios based on guessing what will happen to “franking”. Trying to guess outcomes based on forecasts, media speculation or unlegislated policy is fraught with danger.
There is a better and far smarter way to invest. It’s using the research from academia, what we call the academic advantage.
To take control of your finances and learn more about investments than most financial planners dare to discover check out Scientiam for more readings and insights on how markets really work and how as an investor you can learn how to really invest and not gamble.
It’s your future.
Here’s to smart investing using science not guesswork.