The importance of being FRANK
Sometimes he is called "Frank" and sometimes he is not... who is he? Our old friend ensures that we pay far less tax than we used to... ya gotta love him for that!
Like many terms in the investing world, "franking" is confusing, old-fashioned and has many aliases...
In years gone by, a franking machine was used to stamp outgoing mail or to stamp invoices that were paid. For those who remember tax stamps, it is a small jump to connect "franking" to having the tax paid on an investment. For the younger crowd, we apologise for the jargon: just believe us when we say that "franked" means "tax paid".
From there, you may hear of "fully franked", "partly franked" (100% tax paid or only partially tax paid), or "FF" (fully franked).
The confusing jargon reminiscent of something to do with hotdogs hides a lovely truth: when you receive a cheque from a company that pays fully franked income, you know that THEY have paid the tax and often you do not have to pay any tax on the investment income.
Many Australian companies pay a company tax rate of 30% on their profits before they pay the shareholders, so you would normally only have to pay extra tax if you are on a tax bracket over 30%.
So, how much money could you have, or how much money could you make, and not have to pay any tax?
Let's look at two scenarios:
(assuming that dividends are the average 3.6% and 100% franked)
RITC is another name for "rich"
A retired Australian couple could own a share portfolio worth $863 600 and earn almost $45 000pa with no tax to pay.
A portfolio such as this would bring in around $31 090 in dividend income & $13 320 in franking credits (they would have to pay $666 in Medicare-- for more on why the franking credits are paid as cash, refer to "Think RITCH" Chapter 9 of Who's Taking Your Money (and how to get some of it back!).
no RITC is still good rich
A second Australian retired couple have a share portfolio worth $4.7 Million ($4 700 000) and could receive an income of $170 064 in dividends without paying any additional tax (they would pay $1822 for Medicare)
Super Frank is not a hotdog with a cape on
A third couple could have a share portfolio worth $4.7 Million, as above, but inside of superannuation.
They would receive the same $170 064 in dividends and could also receive $36 444 paid back to their super fund pension account, and would NOT have to pay Medicare...
That is an income of over $200 000 pa with zero tax and zero Medicare levy... Super, huh?
Now you know more about franking and how it can help you to make a LOT of money with LITTLE or NO tax... Excited?
If you have any questions about tax, franking credits and RITC, talk to your accountant or taxation specialist. If you would like to know how to invest or where to invest, talk to a good financial planner or call 1300 762 624 to find one. Once you know how to do it, then (let's be frank) just do it: Invest.
Jeremy Britton DipFA SA(Fin)
[Information provided is of a general nature only and is not to be taken as financial advice. Before making any investment decisions, you should consult an expert to receive advice based on your own unique personal circumstances. Data sourced from technical team at ING Australia.
Investment Management Professionals Pty Ltd, ABN 37 115 359 316, is a Corporate Authorised Representative #306558 of Financial Planning Services Australia Pty Ltd, ABN 55 010 521 810, AFSL 225982. Jeremy Britton can be contacted through www.24hourwealthcoach.com ]