There are a few different benefits you can get from owning shares but here is the best (in my opinion).
‘Franked’ Dividends – Income with 30% tax already paid
Getting dividend income from shares is a way of getting income where you get a credit for tax paid by the company.
When you receive a dividend the slip will list 3 things: Franked Amount, Unfranked Amount (if any) and Franking Credits
Franked Amount – Amount where 30% tax has been paid. If the dividend is fully franked (as many are) the Franked amount will be equal to the cash received.
Unfranked Amount – Amount where no tax has been paid.
Franking Credits or Imputation Credits – The tax paid by the company (the $30 in this case) is the franking or imputation credit. The franking credit is linked to the franked amount as follows:
Franking Credit Formula
Franked amount x 30/70 = Franking Credit (this is because of 30% tax rate on companies)
Here is how it works in practise.
Example 1: Fully Franked Dividend
The company earns $100 profit. They pay tax at 30% ($30). Then they pay a fully franked dividend of $70 (the cash left over).
You receive $70 cash and In your tax return you put in $70 franked dividend and $30 franking credits.
You are taxed on $100 income but you get a tax credit (called an offset) for $30.
The result – depends on your marginal rate (see below for table)
Example 2: Partially Franked Dividend
Same as Example 1 but the company pays $70 dividend but it is only franked at 10%. So the franked amount = $7 and unfranked amount = $63. The franking credit is worked out by the formula Franked amount ($7) x 30/70 = $2.5
You are taxed on $70 cash + $2.5 Franking credit = $72.50 and get credit for $2.50. (click the article to read in full page to view the whole table).
|Your taxable income||Your Tax Rate||Your Tax paid on $100*||(Refund)/Payable Example 1 ($30 less tax)||(Refund)/Payable Example 2 ($2.5 less tax)|
|Up to 35,000||15%||$15||($15)||$12.50|
|Up to 80,000||30%||$30||$0||$27.50|
|Up to 180,000||40%||$40||$10||$37.50|
* Tax Paid would also pay Medicare Levy of 1.5% so in this example would reduce by $1.50.