New investors in the Australian Stockmarket usually have Get Franked Credits on their minds. Questions about what they are and how to get them typically abound. Well, we’re here to help with those.
The Australian market is notable for its high dividend yield of nearly twice the world’s average. That is a lot of money paid to shareholders. With franking, that makes investing a lot more attractive.
Seeing that the Australian market is one of the few that practice franking, knowing all about it will help immensely. That includes help in understanding what stocks to buy and planning your finances.
We can’t talk about franked credits without a little exposition on dividend franking, so let’s get to that.
What Is Dividend Franking?
The status quo of dividend taxation is this: The company pays the first tax before the funds are disbursed. And a second is remitted by the shareholders after they receive their returns. That is double taxation.
But in 1987, the Australian government came up with dividend franking. In this system, the returns get to the shareholders with imputation credits attached. These are called franked credits.
This system was instituted to eliminate the double taxation of dividends. Depending on your tax rate, the attached funds would offset your income taxes or even qualify you for a refund.
How Do Franked Credits Work?
Here’s how it works.
A company pays tax on its profits after the business year —usually 30%. After that payment, they disburse returns to their shareholders. But they also allocate tax credits equal to the amount of tax paid by the company on your dividend.
When the funds get to the shareholders, their income tax is calculated. Those allocated funds are used to reduce the amount they pay.
If their tax amount is less than the franked credits, they can request a refund. The benefits of this system to the shareholders are evident.
How To Get Franked Credits.
There are a few steps to take before you can get them.
- Purchase Dividend Paying Stocks: The first step is to buy shares that pay dividends. Many companies in the ASX do that, but you have to be sure before purchasing.
- The Company Should Be In Profit: Companies are not liable to taxes when incurring a loss. In those instances, the dividends (if they still come) would not undergo franking.
- You Must Hold Your Stocks For The Holding Period: The Australian Stock market has a 45-day holding period before you can qualify for franked dividends.
With these steps, your dividends should qualify for franking. But only residents of Australia are entitled to refunds of the excess after income tax.
This particular peculiarity of the Australian Stock market is one of the reasons why investors troop in. With the extra cash, the tax becomes less burdensome for the shareholders. And for people like some retirees below taxable income, the refunds are a lifesaver. Now you know how to get franked credits, you can go out and purchase some stocks. See you later, investor.