TAX & ACCOUNTING Update:
The following general information is provided by the tax and accounting team at CXC Financial Partners Pty Ltd.
Franking credits were introduced in 1987 as a means to remove double taxation of company profits. Essentially, the Hawke / Keating Government recognised that company profits paid to shareholders had already incurred company tax – adding personal income tax onto an already taxed dividend would considerably lower the after-tax income received by investors (as is the case in the US, who typically see a lot less income from their direct share investments as a result).
Let’s consider 3 investors who hold 1,000 shares in ABC Pty Ltd. ABC is currently trading at $10.00 per share and will pay a fully franked dividend of $0.50 per share.
Both the pension fund and Superannuation fund will receive a rebate as the franking credit is higher than the tax payable on the dividend. The personal investor in a high tax bracket will have to pay some tax however this is substantially minimised by the application of the franking credit.
Targeted use of franking credits can be a compelling strategy however we’d exercise caution to those investors who might consider direct equities as an alternative to cash and term deposits. As always we recommend that you speak with a fully qualified financial adviser to ensure your investments correctly match your personal goals.