Franking credits: it can grow your wealth

If you're looking for ways to boost your retirement income, there's a simple and smart strategy to get more out of your investments. The returns you're receiving on your shares could be even higher, by making the most of franking credits.

How it works

Franking credits are tax credits that a company distributes to its shareholders with its dividends, representing tax the company has already paid.

When your shares return a profit, the company pays corporate tax on the dividends, which is currently 30%. You receive the dividend with a franking credit attached to it for the amount of tax the company has already paid - which you may be able to get back as a rebate. If the amount of tax you're required to pay is less than the franking credit, the ATO will give you a refund on the difference.

Make savings on tax

For example, your share in a company returns a dividend of $1000. The company pays 30% tax or $300, which means you receive the remainder of $700 plus a $300 franking credit. But if your marginal tax rate is 10%, you should only have paid $100 in tax.

You're required to declare your dividend income each year on your tax return. So when you declare your taxable income of $1,000 in dividends, you'll get back the difference between your franking credit ($300) and the tax you should have paid ($100) - a saving of $200. And if you're not eligible to pay tax, you'll get a refund of the entire amount of the franking credit.

Generate a retirement income stream

Now imagine this difference multiplied by all your investment dividends - and it can really start adding up. The trick is to work this to your advantage, and turn your franking credits into a secondary income for your retirement. Because your shares pay dividends on a regular basis, usually every six months, by growing your investments you can generate a secondary income stream to help boost your pension payments.