Franking credits, also known as imputation credits, are uniquely Australian and apply to some companies on the ASX. However, not all shares are Franked. For example, ANZ (ASX: ANZ) has both fully Franked shares and unfranked shares, and this is because a portion of the profit is generated outside of Australia.
Let’s look at how this works. Take a company such as Wesfarmers (ASX: WES). If it makes a $100M pre-tax profit, it will pay 30% tax ($30 million). With $70M after-tax profit left over and a bumper year, it decided to pay all that $70M to shareholders as a fully franked dividend; there will be a $30 million franking credit.
From the shareholders’ point of view, they can then use that credit to pay the tax they would otherwise have to pay themselves. Depending on the individual’s tax rate, they may also receive a tax refund. For example, a pension phase investor with a superannuation balance of less than $1.7M is not taxed.
As such, since WES profits were taxed at 30%, this individual (as a retiree) who is a zero-tax investor will receive the full 30 cents on the dollar refund. It is understandable why, in 2019, when the ALP discussed eliminating tax imputation, those investors in the pension phase were quite angry.
This plays out differently for each tax bracket and the life stage of each investor. As a pension phase investor, some hidden gains could be made using fully franked dividends. Still, this strategy may be less beneficial for someone younger or a high earner, and all investors need to discuss with their accountants which methods work best for them.
Final Thoughts
Everyone’s needs and strategies differ, and the taxation landscape is complex. Therefore, investors must thoroughly discuss their strategies and current investment plans with a tax accountant who understands them. It is also important to note that a person’s portfolio isn’t always the best fit for yours and that, as AB has maintained over the years, you should understand your outcomes, as they may not be the same as his.
Keep investing and learning.
Disclaimer: This article does not constitute financial advice nor a recommendation to invest in the securities listed. The information is intended to be factual only. Past performance is not a reliable indicator of future performance, so as always, do your research and consider financial, legal, and taxation advice before investing.
