October 17, 2018

Franking Credits on Shares Explained

One way that investors make their money work for them is by investing in shares. This means buying a part of a company, making the investor a part-owner. As the company grows, the share price will also grow. The investor will sometimes also receive dividends as a result of the profits of the company.

As a shareholder, you will also need to pay tax when you receive a dividend.

The company you invest in is a business and therefore pays tax to the Australian Taxation Office. As a shareholder, you will also need to pay tax when you receive a dividend .  This is because you need to pay income tax for money earned on any form of income source. In this scenario, both the company and the shareholder pay taxes for money earned. This means tax is paid twice.

To address this, franking credits were established. These avoid double taxation by the government and by the company which can be passed on to shareholders. Also called imputation credits, these are aThyou invest in is a business and therefore to the Australian Taxationidend. This is because yoyon At a basic level if your tax rate is higher than the company tax rate then you in effect only pay the difference.

Here are other important details about franking credits and income tax:

  • Adhere to the 45-day holding rule. To be eligible for franking credits to reduce your income tax, hold your shares at risk for 45 days. Technically, this should be 47 days as the purchase and sale dates are not yet included. Purchase shares before the ex-dividend date. These must also be in your possession on the ex-dividend date.
  • Know your marginal tax rate and franking level of the dividend. To determine if you will receive franking credits as a tax refund or you will pay more tax, you need to look at your marginal tax rate as well as the dividend. Companies in Australia are required to pay a flat tax rate of 30%. If your marginal tax rate is over 30%, you will likely need to pay extra tax. On the other hand, if it’s less than 30% and the dividend is franked, you can get a tax refund.

These are just the basic things you need to know about franking credits on shares. An income tax calculator can likewise give you an idea on the amount of tax that you need to pay. Also, it is best to seek advice from advisers so you will have a better understanding of various terms such as shares, franking credits, income tax, and dividends.

Do you know other things worth-considering about franking credits and income tax in Australia? Share your ideas in the comments section.

About the author  ⁄ Marxa Dillan

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