Investing can be a great way to grow your wealth and save for the future. But there is one potential tool that many people overlook when it comes to investing – franking credits. Franking credits are tax credits that investors can claim on certain investments, such as dividend income from shares in Australia.
These credits can significantly impact the return you can get from your investments, so it’s important to understand how they work and how you can take advantage of them. In this article, we’ll explain why you need to consider franking credits when investing and how they can help you maximize your returns.
#1. Tax Savings
The primary benefit of franking credits is the potential tax savings they can offer investors. Franked dividends are taxed much lower than regular income, which is why they are so attractive to investors. The amount of tax savings depends on the investor’s marginal tax rate and can range from 15% to 45%.
For example, if you are an Australian resident on a 30% marginal tax rate and investing in franked dividends, you may only pay 15% tax on your dividend income. This means that you can keep more of your hard-earned money and put it to work for you in various investments.
In addition to the tax savings, franking credits can help reduce or eliminate the Medicare Levy on certain investments. This means you can have even more of your income go directly into your savings and investments rather than being needlessly taxed away.
#2. Maximising Returns
Franking credits can also help investors maximize their returns on certain investments. While most investments are taxed at the investor’s marginal rate, franked dividends are taxed at the company’s marginal rate. This means that investors can potentially receive a higher return on their investments since the company is paying lower taxes.
For example, if you are an investor in a company with a marginal tax rate of 27%, and the company pays a franked dividend of $100, you would receive up to $73 after taxes. This is much higher than the $70 you would receive if the dividend were not franked.
In addition, franking credits can also be used to offset other investment income. This means that investors can reduce their overall tax bill by offsetting other investment income against the franking credits they receive.
#3. Avoid Double Taxation
One of the key benefits of franking credits is that they can help investors avoid double taxation. Under Australian taxation law, if a company pays out a dividend, the company must pay tax on that income. However, when the investor receives a franked dividend, they can claim a franking credit for the tax that the company has already paid. This means they don’t have to pay tax twice on their dividend income, as they can use the franking credit to offset any tax liability.
In addition, investors can also avoid double taxation on foreign income by claiming franking credits on their dividend payments. Foreign-sourced income is usually subject to double taxation, but if the company paying out the dividend has paid Australian tax on the income, then investors can claim a franking credit for the tax paid by the company and avoid double taxation.
#4. Flexibility
Franking credits offer investors a great deal of flexibility when it comes to their investment strategies. Investors can use franking credits to offset their other investment income, thus reducing their overall tax bill. This can be especially beneficial for investors looking to diversify their portfolios and spread their risk across multiple investments.
In addition, investors can also use franking credits to delay or even avoid paying capital gains tax. The profits are subject to capital gains tax when an investment is sold. However, if you hold onto your investments and use franking credits to offset any tax liability, you can delay or avoid paying capital gains tax on your profits.
Finally, investors can also use franking credits to increase the yield on their investments. As mentioned earlier, franked dividends are taxed at the company’s marginal rate, meaning investors can potentially receive a higher investment return. Please learn more about how franking credits work with HALO Technologies.
#5. Timely Payments
One of the major benefits of franking credits is that they can help investors receive their payments promptly. When you invest in a company, you are entitled to receive a portion of the company’s profits as dividends. However, if the company has not paid any profit tax, the investor may have to wait until it pays its taxes before receiving its dividends.
Nonetheless, investors can receive their dividends quickly and efficiently when an organization pays out a franked dividend. This is because the company has already paid its taxes on the profits, and the investor can claim a franking credit for the tax paid. This allows them to receive their dividend payments quickly, instead of waiting until the company pays its taxes.
#6. Safety & Security
Another benefit of franking credits is the safety and security they offer investors. When you invest in a company, your capital is at risk in the event of a company failure. However, when you receive a franked dividend, you can be sure that your capital is secure and protected from loss. This is because the company has already paid tax on its profits, meaning you can claim a franking credit even if the company fails to pay out your dividend.
In addition, franking credits also offer investors greater protection against inflation. Inflation can erode the value of your investments over time; however, when you receive a franked dividend, you can claim a franking credit for the tax already paid by the company, thus offsetting the effects of inflation.
Finally, franking credits also give investors greater peace of mind as they can be sure that their funds are safe and secure. This is because the company has already paid its taxes, so you can be sure that your dividend payments will not be affected by any changes in the company’s financial situation.
#7. No Need To Obtain Financial Advice
One of the biggest advantages of franking credits is that investors don’t need to obtain financial advice to take advantage of them. This is because franking credits are relatively simple to understand and use. All investors need to do is claim the credit in their tax return, and they can receive the full benefit of franked dividends. This means that investors don’t need to spend the time or money getting professional advice to take advantage of franking credits.
In addition, franking credits are a great way for investors to reduce their tax burden without taking on any additional risk. This is because the company has already paid its taxes, so investors can simply claim a franking credit for the tax already paid and use it to offset their tax liability. This means that investors can benefit from the lower taxes without investing any additional money or taking on any additional risk.
#8. Transparency & Affordability
The final benefit of franking credits is that they are both transparent and affordable. Claiming a franking credit is straightforward, so investors don’t need to worry about complicated paperwork or processes. Additionally, franking credits are also very affordable, as investors can claim credit for the taxes already paid by the company, meaning they don’t have to pay any additional fees or costs.
This means that investors can benefit from the advantages of franking credits without worrying about additional costs or paperwork. This makes franking credits a great choice for investors who want to reduce their tax burden without taking on any additional risk or hassle.
Overall, franking credits are a great way for investors to benefit from lower taxes while still enjoying the safety and security of their investments.
Bottom Line
Overall, franking credits are a great investment tool for investors who want to enjoy the benefits of lower taxes without taking on any additional risk. They provide a safe and secure way to offset taxes by claiming a credit for the tax already paid by the company, and they are also transparent and affordable. This makes them a great option for investors who want to reduce their tax liability without taking on any additional risks or hassle.
