Frankly My Dear, I Give A Damn
Sun Herald
Sunday October 28, 2007
Penny Pryor explains tax on share dividends.
What are we talking about?You may have heard the experts say that one of the chief advantages of investing in the Australian equity markets is the franking credits available to investors. That's because under our imputation system you may be entitled to tax offsets on the dividends you receive. The same is not the case with international shares. By no means should you totally avoid international shares, the benefits of diversification are well documented; you should never put all your eggs in the one basket.But not all dividends are taxed, or franked, and when you receive both franked and unfranked dividends from a particular company it can get a little confusing when it comes to tax time.How does it work?A dividend is the profit a company pays to its shareholders. This is usually paid twice a year, in an interim and final payment. Not all companies pay them all of the time. If there is no profit, there is generally no dividend. Companies also have different polices when it comes to dividends. While some like to return as much as they can to shareholders in the form of dividends, others may prefer to reinvest in research, development and new capital.When you receive a franked dividend you are receiving an amount out of the company's revenue that has already been taxed. Franking credits, or imputation credits as they are also known, are passed on when you receive these dividends.In your dividend statement you will receive details of how much of your dividend is franked and how much isn't.In an example borrowed from the Australian Taxation Office, Bill receives a dividend statement from Company A that details an unfranked dividend of $200, a franked dividend of $700 and a franking credit of $300. Bill's total assessable dividend income is $1200 ($200+$700+300). If Bill earns a salary of $40,000 a year, and his dividend income is his only other income received, then his total taxable income is $40,000 + $1,200 = $41,200. At 2006-07 income tax rates Bill's tax on that income would be $7,710 but that is offset by his $300 franking credit, reducing his final tax payable for the year to $7,410.What else can I do?You don't have to take your dividend as cash; you can always reinvest it into the company in the form of new shares under a dividend reinvestment scheme. If you've invested in a solid blue-chip company then opting for reinvestment schemes may make you a lot more money over the long term. For example, $100 invested in the All Ordinaries index in 1900, due to the magic of compounding, would have grown to more than $60,000 today. But if you'd reinvested your dividends, that amount would be more than $7 million. Worth a thought.
© 2007 Sun Herald