Franking Credits

Understanding return on investment (ROI) is very important when deciding where to put your hard earned retirement savings. Many retirees hold Australian shares. There are historic reasons why – they often became ‘default’ investors when societies such as AMP or NRMA demutualised, or when there was a sale of a government asset, such as Telecom which we now know as Telstra, or Qantas or the Commonwealth Bank. Those retirees who retained ownership in these shares have not necessarily seen the growth in asset prices that they might have, had they invested in international shares or other asset classes.

But investment is not just about capital growth when it comes to retirement income.

And this is where dividends and dividend imputation come into play.

It’s easy to see growth in your assets, year on year, by noting the opening price on 1 Jan and the closing price on December 31. But this will only show a ‘paper’ loss or gain. Last calendar year the ASX 200 increased by 13%. But if you are tracking added value, in addition, it’s important to add to the market increase, the full total of all dividends you received, most likely as bank deposits.

And that still does not cover further added value, as Australian shares carry franking credits (or dividend imputation – the terms are interchangeable) to ensure that, as a shareholder, you do not pay tax as a double up on tax the company has already paid.

Dividend imputation was first introduced by the Hawke Government in 1987. Back then the legislation was designed to ensure that an individual’s tax liability was reduced to zero by noting that tax had been paid already on the specific shares. New Howard Government legislation in 2000 made all franking credits fully refundable, which means that many retirees who were paying no tax would now get a tax credit, in the form of a cash payment, for the shares held.

Initially the franking credit rebates were projected to cost $1.9 Billion per year in foregone revenue. They are now nearing a cost of $8 Billion per annum. But as we saw in the 2019 federal election campaign, attempts to reduce or remove franking credits were far from popular, particularly among retirees who own shares.

How long franking credits will be paid is anyone’s guess, but in the meanwhile it’s important to ensure you include this extra cash when you review your investments and compare performance.

If you want to understand more about different types of investments and how they could fit into your portfolio you can book a consultation with one of our advisers.

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This article is provided by Retirement Essentials Representative Number: 001260855.  We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859.  This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.