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What are Franking Credits Explained?

Almost all investors in Australia have heard about franking credit. Most of them know what it is, and some hear the terms but don’t understand them. You are in luck as we discuss franking credits explained in this article.

But first, it is essential to go through what these products are and how beneficial they are to investors. Read on this section on franking credits explained to find out more.

Franking Credits Explained

This term refers to a tool used by shareholders in Australia to minimize or eliminate the tax imposed on dividends. Companies in Australia paying dividends to investors are often victims of double taxation. The profits earned by the investment company are taxed to the corporation at 30%. When the company pays the proceeds to its shareholders in form of dividends, the earnings are taxed at the individual shareholder tax rate. If you observe keenly, the profits undergo double taxation. To understand this going through franking credits explained is a good choice.

The corporations receiving the profits have already been taxed on the dividends shared with the investors. This means that once an investor receives the profits, they should not be subject to taxation because of the tax incurred by the corporation. The tool enables a company to assign a tax voucher to its investors. Shareholders are then awarded a tax refund or a tax discount on their income. With franking credits explained, you can know whether you are eligible or not.

Importance of These Products

Many investors choose how to invest depending on the rate of return earned on their funds. The return rate includes two elements when it comes to share investments:

  • Sell the profits gained from re-investing

For instance, you buy 100 shares each at $50. If the share price increases and you sell them at $100 each, you will gain $50 on every share. Your total gain will be $5000 –seeing that you got $50 on each share from your initial 100 shares.

  • Gain through dividends

Dividends are a portion of a company’s profits paid to the investor. Therefore, you earn for holding a section of the company. This means that if the shares you hold pay $2.00 per share on your 100 shares, you earn $200.

You should note that your return rate is determined by the amount you keep after paying the taxes. If you want to reduce or eliminate the tax on your dividends, you can incorporate these products. They are ideal for promoting long-standing equity ownership. Besides, franking credits explained have increased dividend payouts to shareholders.

How they Work

The tax bracket for paying to investors in Australia stands between 0-30percent. These products are paid according to the tax rate of the investor. This means that a shareholder with a 0% tax rate receives the full tax sum rewarded by the company to the Australian Taxation Office (ATO) as a tax voucher. The payouts decrease proportionately as the tax rate of the shareholder increases. Therefore, shareholders with more than a 30% tax rate do not receive the franking credits explained with dividends.

The holding period is essential for eligibility. This holding period is usually 45 days in Australia where an investor holds the stock to qualify for a product like this.

How to Calculate

The formula for getting these products is as follows:

(Amount of dividend or 1- tax rate for the company) – Dividend amount = franking credit

Conclusion

This is a concept that was recently instituted. It acts as additional inducements to investors in the lower tax bracket so that they can invest in dividend-paying businesses. Also, franking credits reduce or eliminate double taxation and mostly favor investors. Therefore, going through the above section of franking credits explained will provide insights on how they work.

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