Benefits of owning shares – Dividends

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

Definitions

 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)
0-6,000 0% $0 ($30) ($2.50)
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
180,000+ 45% $45 $15 $42.50

* Tax Paid would also pay Medicare Levy of 1.5% so in this example would reduce by $1.50.

Posted in Shares, Tax

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