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02 9683 2869

Month: May 2021

The magic of franking credits in your portfolio

 A franking credit is a tax credit allocated to the shareholder. The tax credit can offset the tax that is due on the dividend.

It’s obvious that investors select investments based on the rate of return they can earn on their funds. For share investments, the rate of return has two components:

1.  Sell the share for gain – assume you purchase 100 shares at $20 each. If you later sold the shares for $40 each you have made a gain of $20 per share. The total gain is $2,000 ($20 for each share) on the original 100 shares;

2.  Earn a return through a dividend. A dividend is a share of company earnings paid to the shareholder. If your share pays a $1.50 on each of your 100 shares, you’ll earn $150.

Keep in mind that your rate of return should be based on the dollars you keep after taxes have been paid. One way to reduce the tax you pay on dividends is by using franking credits.

How do they work?

Franking credits are a tool used by investors to reduce or eliminate the taxation of dividends. Australian companies that pay dividends to shareholders can be subject to double taxation. The earnings are taxed to the corporation at 30%. If earnings are then paid to shareholders in the form of dividends, they are taxed again at the individual’s personal tax rate.

A franking credit is a tax credit allocated to the shareholder. The tax credit can offset the tax that is due on the dividend.

Assume you receive a $100 dividend and your tax rate is 34.5%. The company has already paid 30% tax on its profit. A franking credit of $30 ($100 x 30%) would reduce your tax liability leaving only 4.5% of the dividend income taxable.

That example applies if the dividend is fully taxed or “fully franked”.

A partially franked dividend means that the tax credit covers only a portion of the taxable dividend payment. However, even a partially franked dividend increases your rate of return.

Assume that the franking credit only covers $20 of the $30 in tax. You’re still ahead because you’ve earned $100 – $10 in taxes, or $90.

Reinvesting + Compounding

If you are able to earn more dividend income after tax and reinvest that income, you can also benefit from compounding. Compounding is defined as earning “interest on interest”.

Assume that you’re able to invest the full $100 dividend, rather than just $90. With compounding, that extra $10 in dividends will earn a return. Over time, reinvesting more dividends can greatly increase your total earnings.

Speak to us about how franking credits can benefit your portfolio. If you would like more information about your options, contact Macarthur Wealth Management on (02) 9683 2869 or info@macarthurwealth.com.au to talk you through your options.

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. https://www.macarthurwealth.com.au

General Advice Warning

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Aussie inflation print gives the RBA more room

Need help? Contact us Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. https://www.macarthurwealth.com.au
A mixed week for equity markets with the US market trending a little higher whilst other markets were flat to slightly lower. 

Of the more than half of the US’s largest 500 listed companies that have reported so far, 87% have beaten analysts’ earnings estimates, with one data provider now predicting a 45% jump in profit growth. 

In local equity markets, AMP said it will spin off and list the private markets part of AMP Capital, AMP’s funds management arm. Private markets relates to both infrastructure and property. The proposed demerger comes after a part asset sale of the business fell through. The demerger is expected to be completed in 1st half 2022. 

Health insurer NIB said they had a 3.7% increase in Australian health insurance customers since the start of the financial year and that there were fewer claims than expected. The strong result more than offset declines in travel-related insurance. 

Tabcorp has received a $3.5 billion offer for its wagering business. The improved offer from the UK based sports betting group Entain, which owns Ladbrokes, was unsolicited. 

Coles reported its first drop in quarterly sales in more than a decade as spending returned to normal after Covid panic buying and lockdowns. The company reported a 5.1% drop in 3rd quarter sales to $8.76 billion. 

Retail group Premier Investments has poached current JB Hi-Fi CEO Richard Murray to take over from Mark McInnes who had decided to step down. Murray will begin in his new role from October 4, whilst his replacement at JB Hi-Fi is Terry Smart, who was the electronics retailer boss from 2010-2014. 

Link Group has confirmed that the consortium of private equity groups has withdrawn their almost $3 billion takeover proposal. The consortium made multiple offers through 2020 with the last offer being $5.40 per share. Link is preparing to sell its 44% stake in PEXA, the online property settlement platform. 

The oil price rose this week due to optimistic expectations about demand from OPEC+ and rebalancing fuel inventories in the USA. 
Australia’s consumer price inflation rose by 0.6% in the 1st quarter, lifting the annual rate to 1.1%. Transport prices were the main driver of inflation in the quarter, with modest gains in food prices. The print came in below expectations and gives the Reserve Bank of Australia continued breathing room to maintain policy support. 

The Australian university sector remains under pressure as almost every state has written off plans for international students to return to Australia as the cost of quarantine becomes an issue. New research shows that there was a 66% spike in international student enrolments over the past decade. The number of international students in the country continues to fall, whilst there has been a more than 5% decline in enrolments and a 23% decline in new students. International education is a $38 billion economy in Australia, whilst the loss of students also accounts for a missing $21 billion in spending locally. 

Australian residential property price growth has slowed this month, but the strong momentum remains. Sydney prices rose 2.3% over the last month, followed by 1.8% in Brisbane, 1.5% in Melbourne, and 0.9% in Perth. Auction clearance rates remain high. Sydney median house prices have broken through the $1.3 million mark. New figures also show that less than 5,000 loan deferrals remain outstanding – a significant improvement, but still represents more than $1.33 billion worth of mortgages. 

The US central bank left rates near 0% whilst upgrading its assessment of the economy and acknowledging that inflation is rising. But they reiterated their stance to keep policy settings accommodative. 
The US House of Representatives passed a Democrat proposed legislation that would make Washington D.C the 51st state in the US, with the house voting along party lines. The legislation effectively seeks to usurp the US Constitution and would make it easier for Democrats to win future elections given their historical support in D.C. The legislation has no chance of passing the Senate but sets the tone for the Biden/Democrat agenda. 

The virtual climate summit of 40 world leaders saw President Biden pledge more aggressive targets saying the US will aim to cut greenhouse gas emissions by 50-52% from 2005 levels by 2030 and encouraged other countries to get more aggressive. Problem is most countries don’t have the wealth of the US nor do they have a central bank able and willing to print money to finance the cost (which will be exorbitant) of meeting these targets. Each country will need to move at their own sensible pace. Australia has committed to a 26-28% reduction over the same period. In contrast, China will continue with greenhouse gas increases through to 2030. 

Australian exporters are bracing for more pressure and sanctions from the Chinese government after our Federal Government cancelled Victoria’s Belt and Road Initiative deal with Beijing. The total volume of exports to China has held up, thanks to a sky-high iron ore price, totalling $96 billion over the 12 months to the end of February. Outside of iron ore revenue, exports to China have fallen almost 30%. 

India reported the world’s highest daily tally of coronavirus cases this week as virus cases and deaths rose, not helped by poverty/living conditions, the inability to physically distance with a population of that size, and an underfunded hospital system. In Japan, 4 prefectures were in the spotlight, including Tokyo and Osaka, as the government considered short and strict states of emergency for each. Meanwhile, the European Union (EU) has said that American tourists that have been fully vaccinated will be able to visit Europe over the summer. The EU also announced that 1 in 4 people in the union have now received their first vaccine dose. Closer to home, we saw a snap 3-day lockdown in parts of WA following just two cases.  

General Advice Warning
The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer
All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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