Franking credits form a very important element of the Australian tax system, and providing you’re willing to invest the time to understand how they work, or work with an Adviser who does, you can significantly improve your personal finances. Many countries around the world have franking credits including Australia. Whether you’re living and working in Australia or you’re an expat living elsewhere, utilising franking credits as part of your investment strategy can be a highly effective option.
This week we explore what franking credits are and what you need to be considering for your investments.
Firstly, let’s explore what a franking credit is
The vast majority of companies in Australia pay corporate tax at a rate of 30% before they pass on some of these profits to shareholders. This is generally paid in the form of a dividend. It’s important to first understand that the Australian Taxation Office (ATO) recognises that the company has already paid tax on these earnings. Therefore, they are treated as ‘credits’ which can be passed onto investors, hence outlining how the franking credits are created, which can then potentially reduce the tax liability of the investor.
Let’s consider a franking credit scenario
We will assume that the Australian publicly listed company XYZ Ltd, trading on the Australian Stock Exchange (ASX), pays a dividend to shareholders of $0.70 and pays a corporate tax rate of 30%. As a shareholder of XYZ, your taxable income will be $1.00 (dividend of $0.70 in addition to the franking credits of $0.30). The $1.00 amount is recorded in your tax return as income and as XYZ Ltd has already paid $0.30, in the form of corporate tax, you will be able to deduct this amount from your overall tax liability.
Let’s explore how this could work for you
If we assume you’re earning a salary of $45,000 per year, and your personal marginal tax rate is 15%. As a shareholder of XYZ Ltd, which paid a fully franked dividend as they’ve paid the full $0.30 (30%) in corporate tax, you could receive a credit in addition to the dividend as your personal marginal tax rate is lower than the company’s rate.
If this situation were reversed and your personal tax rate was higher than the company’s rate of 30%, then you would be liable to pay the difference between your tax rate and the company’s tax rate of 30%. This highlights how it is possible, particularly for retirees, to generate an attractive tax-efficient income by utilising franking credits.
As an Australian expat living and working abroad, you can look to utilise franking credits through your superannuation account. As your superannuation is an Australian vehicle, it therefore remains taxable at home regardless of your tax residency. Your superannuation will pay a tax rate on dividends received within the fund of 15%. Your superannuation fund may also receive the franking credit, as outlined in the scenario above, which can in turn improve the overall yield of your investments.
Speak to your financial adviser and consider how you can be utilising franking credits as part of your investment strategy.
To your financial success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.