What are franking credits?
Franking credits arise as part of the imputation system. They stop the ATO (Australian Tax Office) 'double taxing' a company's profits — and your dividend!
What does that mean?
In a nutshell, because most Australian companies pay tax at 30%, the ATO has granted tax relief to shareholders (read: owners of the company) so they don't get taxed again on the same profits.
For example, if a $70 dividend is 100% franked at the corporate rate of 30%, it means some tax has already been paid by the company. For simplicity, that would mean the total dividend is $100. An extra $30 of tax already paid on the company's profits (which was used to pay the dividend) is credited to your name and held by the ATO until you lodge your tax return.
If your tax rate is 0%, you could use the $30 in franking credits to 'offset' your tax from other investments or your wages, or get a refund.
If your tax rate is 30%, it effectively neutralises your tax on the dividend. And if you earn a lot of money (lucky you!) and pay tax at 45%, you'll still be required to pay an extra 15% tax.
Just keep in mind that 'fully franked' means the entire dividend was taxed at 30%. Obviously, 'partially' or 'part franked' means only part of your dividend (e.g. $40 of the $70 dividend) has been taxed. Unfranked dividends carry no tax benefit.
There are a few criteria and not everyone is eligible for franking credits.
For example, only Australians can claim the tax credit and you must hold the franked dividend shares at risk for at least 45 days. Note: the 45-day holding rule does not include the date of purchase or sale, and applies only if you receive more than $5,000 of franking credits. That would equate to a dividend of around $11,000.
Let's put this into action…
5 franked ASX dividend shares now!
- Mantra Group Ltd (ASX: MTR) is the growing hotel operator. Contrary to what you may think, Mantra does not own all the properties operating under its name. Many of them are independents that simply pay a fee to Mantra. It is forecast to pay a dividend of 13.5 cents per share (fully franked) over the next year. At Mantra's share price of $2.76, that's a yield of 4.9% fully franked ($0.135 / $2.76).
- Integrated Research Limited (ASX: IRI) is a $500 million software business. It provides diagnostics for testing and monitoring a company's computer systems. It is forecast to pay a 70% franked dividend equivalent to a yield of 2.4% at today's share prices. That's around 3.2% when we include the franking credits.
- Vocus Group Ltd (ASX: VOC) is the owner of telecommunications brands like Dodo, M2, Primus, Amcom and much more. Thanks to a recent fall in the Vocus share price, its shares are offering a 3.4% fully franked dividend yield. In 'gross' (tax adjusted) terms, that's 4.8%.
- TPG Telecom Ltd (ASX: TPM) is another bustling telco, it owns the growing TPG broadband service. It is also pushing into the mobile market through a partnership with Vodafone and owns the iiNet brand. Its shares pay a dividend of around 2.4% fully franked.
- National Australia Bank Ltd. (ASX: NAB) is a name synonymous with banking in Australia. It is also a heavyweight in business banking. NAB shares offer an impressive 6.1% fully franked dividend yield.
