Whenever I give a presentation about investing I ask the audience how much they know about franked dividends. It doesn’t matter whether they’re working or retired, the response is always the same: nothing.
So I give them a quick summary of the franking system, explaining how companies that have paid Australian company tax have franking credits available, which they then pass on to their shareholders.
A lack of knowledge about how Australia’s franking credits system works means many could be sitting on surprise payouts.Credit: Dominic Lorrimer
This lack of knowledge is a sad state of affairs given that the franked dividend system allows almost everybody earning under $135,000 a year to receive tax-free dividend income from 1 July.
Let’s assume a person is earning $130,000 a year and has a $100,000 portfolio of Australian shares paying fully franked dividends. In the year ending 30 June 2025 the dividend was $4000 and the growth was $5000. That’s a total return of $9000.
There is no capital gains tax to pay because CGT is not payable until the investment is cashed in, while the 30 per cent tax on the dividend is cancelled by the 30 per cent franking credit.
These thoughts came to mind as I was chatting to a cousin who has been widowed for six years, and who is now 75. She had had a long and happy marriage, and her thrifty husband left her some good investments, including a bundle of Commonwealth Bank shares.
When I remarked to her how much she must enjoy the franked dividends, her response came out of left field: “They are great; I use them to buy more CBA shares”.
I responded that dividend reinvestment is a great strategy, but she can still have the money back in cash. She said, “I don’t think you understand. I don’t take the dividends, they’re automatically reinvested, so I get more shares to make compounding work for me.”
The widow, the franking credits, and the $12,000 windfall
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05.03.2024
Whenever I give a presentation about investing I ask the audience how much they know about franked dividends. It doesn’t matter whether they’re working or retired, the response is always the same: nothing.
So I give them a quick summary of the franking system, explaining how companies that have paid Australian company tax have franking credits available, which they then pass on to their shareholders.
A lack of knowledge about how Australia’s franking credits........
© The Sydney Morning Herald
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