If you’re an investor, you know that franking credits are important. But do you know why they’re so important? This blog post will discuss 8 reasons why they’re important for investors. We’ll cover everything from the benefits of frank credits to reducing your tax bill. If you want to learn more about frank credits, read on.
1. Companies that offer franking credits tend to be more stable
One of the most appealing things about franking credits is that they usually come from large, stable companies. These businesses have been around for a while and have a good track record of paying dividends. That stability can be appealing to investors, especially in volatile markets.
In addition, companies that offer franking credits tend to have strong balance sheets. That means they’re less likely to experience financial problems in the future. And if they do, they’re more likely to weather the storm and rebound quickly.
2. Help to increase the overall ROI
While stability is essential, investors also want to earn a good return on their investment. Fortunately, franking credits can help with that as well.
Companies that frank their dividends often have higher dividend yields than companies that don’t. That’s because franking credits increase the overall value of the dividend. As a result, investors who receive franking credits can earn a higher return on their investment.
Check out how companies with fully franked dividends perform in this guide, franking credits explained with HALO Technologies.
3. Can be used to reduce the cost of borrowing money
You can use franking credits to reduce the cost of borrowing money. If an investor takes out a loan to buy shares, you can use franking credits to offset the interest expense.
Another example is when investors use margin loans to buy shares. In this case, the interest expense can offset the franking credits received on the dividends.
In essence, franking credits act like a discount on the loan. The more franking credits you have, your effective interest rate will be lower.
4. Play an important role in the retirement savings of australians
Franking credits are a key part of the retirement savings of Australians because self-funded retirees often rely on income from dividends to fund their lifestyle. And since franking credits increase the overall value of the dividend, they can go a long way in helping retirees cover their costs.
In addition, you can also use franking credits to reduce the tax bill of retirees because the tax rate on dividends is lower than the marginal tax rate. As a result, retirees can keep more of their hard-earned money. For example, a retiree in the 30% tax bracket would only pay 15% on fully franked dividends.
5. A way of reducing the amount of tax
Franking credits are a great way of reducing the tax you pay on your investment income. That’s because the tax rate on dividends is usually lower than your marginal tax rate. And, if the dividends are fully franked, you’ll receive a credit for the corporate tax that has already been paid.
This can result in significant tax savings, especially for high-income earners. For example, someone in the 37% tax bracket would only pay 19% on fully franked dividends. That’s an 18% saving!
In addition, franking credits can offset other taxes, such as capital gains tax. That means you could pay less tax on your investment income overall.
6. Provide an incentive for companies to distribute their profits
Another benefit of franking credits is incentivizing companies to distribute their profits because shareholders get the full value of the dividend, including the franking credit.
This can lead to companies paying out more of their profits in dividends. And that’s a good thing for shareholders because it means they’re getting a bigger slice of the pie.
It’s also good for the economy because it can lead to more investment and economic growth. For example, if a company reinvested its profits instead of paying them out as dividends, it would have more money to invest in new projects.
7. Help maintain Australia’s competitive edge in the global economy
Franking credits help to maintain Australia’s competitive edge in the global economy. That’s because they make our dividend tax system more attractive to foreign investors.
As a result, Australia can attract more foreign investment, which is good for the economy because it leads to more jobs and economic growth.
So, if you’re looking for a way to reduce your tax bill, franking credits are worth considering. Just be sure to consult a tax professional to see if they’re right for you.
8. Support economic growth and employment opportunities
Finally, franking credits can help to support economic growth and employment opportunities. That’s because they make our dividend tax system more attractive to foreign investors.
As a result, Australia can attract more foreign investment, which is good for the economy because it leads to more jobs and economic growth.
Additionally, businesses can use franking credits to reduce the cost of capital, which can lead to more investment and jobs. For example, a company might use franking credits to offset the cost of borrowing. This could lead to the company expanding its business and hiring more employees.
Final thoughts
Franking credits are a key part of the retirement savings of Australians because self-funded retirees often rely on income from dividends to fund their lifestyle. And since franking credits increase the overall value of the dividend, they can go a long way in helping retirees cover their costs.
In addition, you can also use franking credits to reduce the tax bill of retirees because the tax rate on dividends is lower than the marginal tax rate. As a result, retirees can keep more of their hard-earned money.
The bottom line is that franking credits are a valuable tool for retirees and can help to reduce the overall tax bill. Before you opt in, speak with a tax professional to ensure it’s the right decision.