• Tax

    Introducing Frank.

    Michael Brown, Director, Operations & Finance
    05 May 2016
     

    ‘Frank’ is short for ‘franking credits’ or ‘dividend imputation’.

    Life before Frank was different. Income received as dividends was taxed twice: firstly, at the company rate when the company paid its tax; and then a second time at the investor’s individual income tax rate when they received the dividend.

    Frank was born in 1987 during the Hawke/Keating years. The impact of Frank is that investors who receive divided income are now only taxed to the extent of their tax rate on their share of the company’s pre-tax profit. This means with the company tax rate of 30%, investors with a tax rate of 30% pay no more tax, those on a tax rate above 30% pay the extra to top up to their individual rate and those on a tax rate below 30% receive a tax credit from the ATO to reduce the total tax paid to their individual tax rate.

    For example, if their individual rate is 49% then an investor will only pay the difference which is 19%.

    Frank matured when he turned 13. Since the year 2000 franking credits became fully refundable. That means that all Australian investors who do not pay tax or who have a tax rate less than 30% can be entitled to a refund. Frank sends some Australian shareholders cheques from the ATO.

    In particular SMSFs and retirees can receive cheques from Frank.

    Let’s have a look at Frank in action:

    Let’s assume you own $10,000 of FRANK LTD’s shares. The current price of FRANK LTD is $16 per share meaning you own 625 shares.

    FRANK LTD makes $2 of profit per share and pays company tax at 30% on that profit which is 60 cents, leaving $1.40 cents per share. FRANK LTD decides to pay shareholders $1.20 as a ‘100%’ or ‘fully’ franked dividend and to retain the rest to grow the business. Being fully franked means FRANK LTD attaches a 30% imputation credit to its dividend for the company tax it has already paid. This is not something you receive in cash from FRANK LTD. You need to claim FRANK LTD’s imputation credit as a ‘rebate’ or ‘offset’ in your annual tax return.

    CALCULATING 100% FRANKED INCOME

    Investment

    Share price X
    # of shares held

    (625 X $16)

    $10,000

    Dividend Income

    # of shares held X
    dividend

    (625 X $1.20)

    $750

    Franking Credit*

     

    (30/70 X $750)

      $321.43

    Taxable Income (share of pre-tax company profit)

    Dividend Income + Franking  Credit

    ($750 + $321.43)

      $1,071.43


    TAX TREATMENT OF FRANK LTD’s DIVIDEND

     

    Investor 1

    Investor 2

    Investor 3

    Investor 4

    Tax rate#

    0%

    15%

    34.5%

    49%

    Typical Investor

    Retiree

    SMSF

    Individual

    Individual

    Dividend Income

    $750

    $750

    $750

    $750

    Franking Credit

    $321.43

    $321.43

    $321.43

    $321.43

    Taxable Income (share of pre-tax company profit)

    $1,071.43

    $1,071.43

    $1,071.43

    $1,071.43

    Gross tax payable

    $0.00

    $160.71

    $369.64

    $525.00

    Franking credit rebate

    $321.43

    $321.43

    $321.43

    $321.43

    Tax payable/ (refundable)

    ($321.43)

    ($160.71)

    $48.21

    $203.57

    After tax income

    $1,071.43

    $910.71

    $701.79

    $546.43

    # Tax rates include the Medicare Levy and the Temporary Budget Repair Levy as applicable.

    As you can see from the tables above a retiree paying no income tax would receive a $321.43 refund from the ATO, while an individual on the highest marginal tax rate would only pay $203.57 on the $750 received.

    It is no wonder that Australian investors are attracted to stocks which pay fully franked dividends.

    VanEck Vectors S&P/ASX Franked Dividend ETF (ASX code: FDIV), which commenced trading on ASX last week, is the first Australian equity ETF available on ASX that only includes companies that pay out dividends with 100% franking credits. This means that investors in FDIV can expect that the dividend income the fund distributes will have 100% franking credits attached.

    If you would like more information on FDIV please contact our ETF specialists on 02 8038 3300 or email us at info@vaneck.com.au




    IMPORTANT NOTICE: This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity of the VanEck Vectors S&P/ASX Franked Dividend ETF (‘Fund’). This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation nor needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the Fund.

    The "S&P/ASX Franked Dividend Index" is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and ASX Limited (“ASX”) and licensed for use by VanEck. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed by VanEck. FDIV is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, or ASX and none of them makes any representation regarding the advisability of investing in FDIV. Such parties do not accept liability for any errors, omissions, or interruptions of the S&P/ASX Franked Dividend Index and do not give any assurance that FDIV will accurately track the performance of the index or provide positive investment returns. Inclusion of a security within the index or Fund is not a recommendation by any party to buy, sell, or hold such security