There are shareholders who do not understand the importance of fully franked dividends and don’t get to maximise their benefits. Why do some companies have franking credits and some don’t?
Franking credits are the tax a company pays on the earnings before it pays out to shareholder dividends and are usually declared twice in a year. Shareholders should ideally look for grossed-up dividends that have built in fully franked credits.
Note that not all dividends have franking credits automatically built in them. Companies which pay less than 30% of tax on their earnings because of a tax break or losses carried forward have dividends which have both unfranked and franked components.
Because dividends are a form of income, shareholders are often required to pay tax on it but under the imputation system of Australia, where companies distribute dividends with franking credits equal to the paid tax, they are entitled to get the tax back through a rebate when they declare their tax return.
Dividends are not tax free, though. The rebate depends on the personal tax rate and if the company pays less than 30% on tax, the shareholder can keep the difference. If the tax rate is more than the 30% company tax rate, the shareholder will pay the difference.
Couples who have different tax rates may want to buy shares in the name of the spouse who can receive a full refund of franking credits. A retiree with a tax-exempt pension income may also use the refund of franking credits to add to their income.
Those who will buy a stock just to receive a fully franked dividend should remember that franking credits over $5,000 will require them to hold shares for at least 45 days. This typically takes a $150,000 share portfolio to put them over the limit.
Remember that a high franking balance won’t guarantee that a company will return substantial amounts to shareholders right away, especially those with a large capital and debt commitment.
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