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Getting frank with dividends

I’ve heard that some people can buy shares and actually can reduce their overall tax bill by something called franked dividends and dividend imputation. Is this true?

Certainly tax bills can be reduced, thanks to franked credits. Dividends paid to shareholders can be unfranked, fully franked or partially franked. If they’re fully franked then the company has paid 30 per cent tax – the company tax rate. If your tax rate is higher, you make up the difference but if it’s lower then you get a tax credit, which could help create a tax refund!

For people who buy their shares in their self-managed super fund, which is taxed at 15 per cent, you can see how buying fully franked shares inside such a fund can be very attractive.

Let me give you an example of how the franked dividend affects your tax position. Assume you received $14,000 in dividends and they’re fully franked. That means the total dividend was $20,000 and the tax was $6000, which is 30 per cent of $20,000. If you earned $40,000 from your job, your combined total income is $60,000 and if the tax on this was $7200 but you have already ‘paid’ $6000 via your shares, you only owe $1,200.

It’s not magic and you aren’t saving tax because indirectly you have paid it, but it does make fully franked shares rather appealing. Also, when you compare a dividend yield to, say, interest on a fixed deposit at a bank, then you have to remember that the five per cent dividend comes with a tax present and this is an important point.

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

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, October 28, 2010

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