Understanding Franking Credits

One of the benefits of investing in Australian Shares are the franking credits that are attached to their dividends, which provide a tax effective income stream to Australian shareholders. Felicity Cooper, from RBS Morgans Gold Coast has put together this handy infographic on how franking credits work.

When you earn interest on any cash you have in your bank account you pay tax on that at your marginal tax rate. The companies that pay you dividends, however, have already paid tax at a rate of 30% on those earning, and that tax credit can be attached to your dividend, so that you can:

(a) Receive a refund on that tax paid (if your tax rate is lower than 30%), or

(b) Only have to pay the difference between the tax that would be payable at your marginal tax rate, and the 30% already paid