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Be fully frank with me

I am told that you can buy shares that pay fully franked dividends and they can be very tax-effective and even some people I know say their self-managed super fund can receive a tax refund. Is this possible and could you explain?

Some investors will only buy companies that have a history of paying good dividends and especially those that come with fully franked tax credits. This means that the company has paid company tax of 30 per cent on the dividends paid out to shareholders. Now, this can help some taxpayers qualify for a tax refund. The whole story relates to the dividend imputation system introduced in 1987.

Before this system came into play, the tax office double taxed, that is, the company and the investor.

Now you will only be taxed the difference between 30 per cent and your marginal tax rate. If your tax rate is 30 per cent, then there’s no tax to pay but if your tax rate is less, then you could wind up with a refund.

This nice little earner has been possible only since 2000 when franking credits became fully refundable. That means if you didn’t have any taxable income and you receive a dividend cheque, you would be up for a refund.

Some SMSF trustees set up their fund so they will have little or no tax to pay or they even get a tax refund. This means buying shares that are fully taxed and this gives a tax credit equal to 30 per cent, which is the company tax rate. Note, some companies might pay a partially franked dividend, which can happen when a company pays a lot of tax overseas and these companies will mean you as the investor will pay more tax.

This fully franked matter is important when it comes to selecting your shares, if dividends and tax minimisation is important to you.

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Need help? Read 10 share-trading tips for beginners.

And, how do you pick your stocks?

Plus, read more about the tax benefits of franked dividends.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Published on: Friday, November 26, 2010

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