If you have ever invested in Australian shares, you must have heard of franked dividends. You have probably received them without understanding what they are or how they are even calculated. Many top Australian companies and banks are known for paying reliable income, with an average yield of about 4% over the past four decades. And with franking credits, your stock on returns can never look as attractive anywhere else, especially for investors in the retirement phase.
So in this guide, we’ll give you an overview of franked dividends, including how they work, their advantages, and the 45-day rule.
What Are Franked Dividends
In Australia, dividends are divided into two types which are the franked and unfranked. A franked dividend has tax credits attached to it. While the latter don’t have any tax credit linked to them. All stock companies are charged with an annual tax on their profits, usually a flat tax rate of 30%. The rest of the profits are shared among investors after company tax has been removed from yields.
And for investors, these profits are also considered taxable income, meaning that before Australia introduced franked dividends, all yields were taxed twice before they got to shareholders. With the franking system, the issue of double taxation by the government was resolved. So after the company you invest in has been taxed, the Australian tax office immediately passes tax credits to you, and these credits are referred to as imputation or franking credits.
How Do They Work?
Now that we have defined it for you, let’s explore how the franking system works practically. The company considers your payouts and the tax credits to get your tax return. If your tax rate is 30%, which is the same as that of the company, you’re totally free on tax.
Also, if your tax rate is less than 30%, you will have a tax return with your payout. Franked dividends are not so complicated. You just need to understand and get the hang of them.
Benefits Of Franked Dividends
- Double Taxation Issue Solved: You can now worry less about taxing your profits on two different levels. You are confident that a reasonable amount of stock on return will be coming your way.
- Offsets Tax To Pay: This system counterbalances the individual income tax imposed on your profits after the company level tax.
- Brings Stability To The Stock Trade: Firms that issue franking credits attract stakeholders to themselves, as not all firms implement this.
This system influences your choice as a consumer, And as you re-invest, the company you are involved with grows. This investment will bring efficacy and stability to the stock market.
The 45-Day Rule
While franked dividends are a great way to maximize your profits from investments, there are rules that you have to follow for you to be eligible to get franking credits. One of these rules is the 45-day rule.
You can’t just buy a stock at the end of the year, receive dividends the next day and expect to have them franked. To be granted franking credits, you have to hold your shares for a minimum of 45days. And this duration excludes the day of purchase.
This system is quite different from other countries and is a sweet deal for investors. We hope that you now understand the concept of franked dividends. See you next time.