Stake Academy AUS: Franking Credits
Nobody wants to be taxed twice. That’s why Australia invented franking credits, a tax deduction that accounts for the extra tax paid on dividends.
The following article discusses franking credits, you want to learn more about dividends please check out our Stake Academy AUS: Dividends blog. If not, let’s dive into the backbone of many Super accounts (Stake Super), franking credits.
Credit To Frank
Benjamin Franklin once said, “nothing can be said to be certain, except death and taxes”. Still, most people don’t like paying taxes once, let alone twice.
Remember, as a shareholder, you own a piece of the company. The tax the company pays is profit that otherwise would have been allocated to shareholder value. Therefore, you are essentially being taxed twice when the dividends paid out profit are taxed as income.
One of the unique benefits of investing in Australian-listed companies is the system of franking credits. Franking credits are an income tax deduction that refunds the portion of the dividend where the company has paid tax.
Deducting Your Deduction
So, how do you know if you are entitled to a franking credit deduction? When a company issues a cash dividend, the dividend is either fully, partially, or not franked, depending on the percentage of the company’s profits that paid tax in Australia. This percentage forms the deduction you are entitled to on your income tax.
For example, the Woolworths Group’s ($WOW) dividend is fully franked. This means that Australia has already taxed 100% of the profit used to pay the dividend. Therefore, you will receive a tax deduction on top of the dividend based on the company’s corporate tax rate. So when looking at a company’s dividend yield on the ASX, be sure to look at its percent franked, as a company with a fully franked dividend might offer more than first meets the eye.
Don’t worry; you will be able to see franking information on Stake’s platform soon! In the meantime, the information is included with your tax documents.