Some dividends that are paid to shareholders have a refundable tax credit known as a franking credit.
This simply means that the company has paid tax on company profits and the tax credit attaches to the dividend when paid to the shareholder.
The big companies should pay company tax at 30% and if they pay out a fully franked dividend, the franking credit might come back to you in cash depending on your marginal tax rate.
𝐓𝐈𝐏 𝐎𝐅 𝐓𝐇𝐄 𝐃𝐀𝐘:If you are thinking about buying shares, it might be a good idea for the spouse with the lower income to buy them.
Mary and Ted are keen investors. Mary has a great job where she earns over $300,000 a year.
Ted is a stay at home dad and earns very little. From a tax point of view, it might make more sense if all the shares were bought under Ted’s name, to take advantage of his tax free threshold and much lower tax rates.
Mary’s tax rate is $47%. So, she would end up paying additional tax on fully franked dividends of 17% (commonly known as top up tax).
Whereas, Ted would end up in this case receiving the franking credit as cash. This could be $000’s over a period.
Like any tax advice make sure you get help for your specific situation.
𝐈𝐟 𝐲𝐨𝐮 𝐚𝐫𝐞 𝐚 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐨𝐰𝐧𝐞𝐫 𝐚𝐧𝐝 𝐲𝐨𝐮 𝐚𝐫𝐞 𝐨𝐯𝐞𝐫𝐰𝐡𝐞𝐥𝐦𝐞d, 𝐈’𝐯𝐞 𝐠𝐨𝐭 𝐲𝐨𝐮𝐫 𝐛𝐚𝐜𝐤.
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