Are all ASX shares fully franked? It’s a question that many investors are grappling with. The answer is not always straightforward, and it can be hard to know where to turn for reliable information. In this article, we’ll dive deep into the world of Australian stocks and explore the nuances of franking.
First, let’s take a step back and define what we mean by “fully franked.” Essentially, this term refers to the dividends that a company pays out to its shareholders. When a company is fully franked, it means that the dividends come with a credit for the amount of tax that has already been paid by the company. For investors, this can be a very attractive prospect, as it means that they won’t be double-taxed on their earnings.
So, are all ASX shares fully franked? Well, the answer depends on a few different factors. Firstly, it’s worth noting that not all companies pay dividends – some may choose to reinvest profits back into the business instead. Additionally, even among those companies that do pay dividends, the level of franking can vary widely. Some may be fully franked, while others may only be partially or not at all. In order to make informed decisions about your investments, it’s important to understand these nuances and do your research accordingly.
Fully Franked Shares Definition
Fully franked shares refer to the type of Australian shares that provide their investors with fully franked dividends. Basically, a franked dividend is a payment that a company pays out to its shareholders using profits that have already been taxed at the corporate tax rate, currently set at 30%. This tax credit can then be passed on to the shareholders who are Australian tax residents to offset their tax liability come tax season.
However, not all ASX shares are fully franked. Some companies choose to partially frank their dividends, while others offer no franking credits at all. As such, fully franked shares tend to be more attractive to investors because they come with an added incentive that can help cushion the impact of taxes on their income from investments.
Understanding Franking Credits
Franking credits, also known as imputation credits, are an important aspect of investing in Australian stock markets. In simple terms, franking credits refer to tax paid by a company on behalf of its shareholders. When a company pays tax on its profit, it passes on the benefit to its shareholders by attaching a franking credit to the dividends they receive. This means that the shareholder receives the dividend plus the tax the company has already paid, allowing them to avoid double taxation.
- Franking credits are only available to Australian taxpayers who earn the dividend income and are in a position to benefit from the franking credits.
- The amount of franking credit attached to a dividend varies depending on the amount of tax paid by the company and the tax rate applicable to the individual shareholder.
- If a shareholder’s marginal tax rate is higher than the company tax rate, they may be required to pay additional tax on the dividend income they receive.
Benefits of Franking Credits
Franking credits provide several benefits to shareholders, including:
- Reduced tax liability: Franking credits allow shareholders to reduce their tax liability by claiming a credit for tax already paid by the company.
- Steady income stream: Companies that pay fully franked dividends are often mature, cash-rich businesses that offer a stable and reliable income stream for investors.
- Diversification of investments: Franking credits provide an opportunity for investors to diversify their investments, particularly for those seeking income-focused portfolios.
Franking Credit Rates
The amount of franking credits attached to a dividend depends on the tax rate paid by the company. For example, if a company has paid tax at a rate of 30%, the franking credit attached to a dividend payment of $1.00 would be 30 cents.
| Company Tax Rate | Franking Credit |
|---|---|
| 30% | 30 cents |
| 27.5% | 27.5 cents |
| 25% | 25 cents |
Franking credits are an important consideration for Australian investors seeking to maximise their returns. By understanding franking credits and the benefits they offer, investors can make informed decisions about their investments and achieve their financial goals.
Benefits of investing in fully franked shares
When investing in the stock market, one important factor to consider is whether the shares you hold are fully franked or not. Fully franked shares offer a number of benefits to investors, including:
- Increased returns: Fully franked shares offer higher after-tax returns than non-franked shares, as the tax paid by the company is credited to the investor’s tax account.
- Stable income: Fully franked dividends provide a more stable and reliable source of income for investors compared to non-franked dividends, which may be subject to significant fluctuations.
- Risk reduction: Fully franked shares can help reduce an investor’s overall portfolio risk. This is because companies that pay fully franked dividends tend to be more established, profitable and financially stable, reducing the risk of capital loss.
How to identify fully franked shares
Not all ASX listed shares are fully franked, so it’s important to know how to identify them. Companies that pay fully franked dividends will usually provide information about their dividend policy on their website. Alternatively, investors can use online resources such as the ASX website or financial news websites to find out more information about a company’s dividend policy.
The importance of franking credits
Franking credits are an important aspect of fully franked shares, as they allow investors to claim a credit for the tax paid by the company on their behalf. This credit can be used to offset the investor’s own tax liability, potentially resulting in a lower tax bill or even a tax refund. Franking credits may also be used to reduce the tax payable on other investment income streams, such as rental income or capital gains.
| Share type | Dividend amount | Franking credit |
|---|---|---|
| Non-franked share | $100 | N/A |
| Fully franked share | $100 | $42.86 |
In the above table, a fully franked dividend of $100 comes with a franking credit of $42.86, meaning that the company has already paid tax of $42.86 on behalf of the investor.
Partially franked vs fully franked shares
When it comes to investing in shares on the ASX, understanding the difference between partially franked and fully franked shares is crucial. Here, we’ll delve deeper into this topic and explore the key differences between these two types of shares.
- Franking Credits: A franking credit is a tax credit that is attached to dividends paid to shareholders. It represents the amount of tax paid by the company on its profits before it distributed them as dividends. Companies can choose to pay fully franked dividends or partially franked dividends. Fully franked dividends are those where the company has paid the full amount of tax on its profits, whereas partially franked dividends are those where the company has only paid part of the tax.
- Tax Implications: The tax implications of investing in fully franked versus partially franked shares can be significant. When it comes to fully franked shares, the franking credits attached to dividends can be used to offset any tax owed by the shareholder. This means that investors in fully franked shares may be able to claim a credit for the tax paid by the company and reduce their overall tax burden. However, with partially franked shares, investors may not be able to fully claim back the tax paid by the company, which could result in a higher tax bill for the investor.
- Investment Strategy: Whether to invest in fully franked or partially franked shares is a decision that should be based on an investor’s individual tax circumstances and investment goals. For those who are looking for tax-effective investments to offset their tax bill, fully franked shares may be the better choice. Conversely, for those who are in a lower tax bracket or who are seeking more diversified investments, partially franked shares may be more appropriate.
Ultimately, the decision to invest in fully franked or partially franked shares is a personal one that should be made with careful consideration of one’s individual financial situation and investment objectives.
Wrap up
Understanding the difference between fully franked and partially franked shares is an important part of investing in shares on the ASX. While fully franked shares may be tax-effective for some investors, others may find partially franked shares to be a better fit for their investment strategy. As with any investment decision, it’s important to carefully consider one’s individual goals and circumstances before making any investment decisions.
Companies that offer fully franked shares
When investing in the Australian Stock Exchange (ASX), it is important to consider which companies offer fully franked shares. These are shares that come with a tax credit for the amount of company tax already paid on the profits. Australian investors prefer fully franked dividends as it means that no further tax will be paid on the dividend amount. Here are five companies that offer fully franked shares:
- BHP Group – BHP is a leading global resources company that produces minerals such as iron ore, copper, nickel, and oil and gas. It is one of the largest companies listed on the ASX and offers fully franked dividends to its shareholders.
- Commonwealth Bank of Australia – Commonwealth Bank is one of the largest financial institutions in Australia, offering a range of banking and financial services to individuals, businesses, and institutional clients. The bank has a long-standing history of offering fully franked dividends to shareholders, making it a popular choice for income investors.
- Woolworths Group – Woolworths is one of Australia’s largest supermarket chains, operating more than 1,000 stores across the country. The company offers fully franked dividends to shareholders as part of its commitment to provide sustainable returns.
- Rio Tinto Group – Rio Tinto is a leading global mining group that produces a wide range of commodities, including iron ore, copper, aluminium, and diamonds. The company has a strong track record of paying fully franked dividends to its shareholders.
- Telstra Corporation – Telstra is Australia’s leading telecommunications and technology company, providing a range of products and services to customers around the world. The company offers fully franked dividends to its shareholders as part of its commitment to delivering sustainable returns.
Factors to consider when investing in fully franked shares
While fully franked shares can be an attractive investment option for many Australians, it is important to consider other factors before making any investments. Some factors to consider when investing in fully franked shares include:
- The financial health of the company
- The dividend yield
- The company’s growth prospects
- The level of competition in the industry
- The regulatory environment in which the company operates in
The benefits of fully franked shares
Fully franked shares offer a range of benefits to investors, including:
- Reducing the overall amount of tax an investor has to pay on their investment income
- Increasing the overall amount of funds an investor has available to reinvest or use as income
- Providing a steady income stream through dividends
- Offering a potentially higher return on investment compared to other investment options
Conclusion
Investing in fully franked shares can be a smart investment strategy for Australians looking to generate income and reduce their tax liability. It is important to research and carefully consider the factors when investing in fully franked shares to ensure that the investment aligns with your personal financial goals and investment strategy.
| Company | Dividend yield | Market capitalisation |
|---|---|---|
| BHP Group | 4.99% | $124.02B |
| Commonwealth Bank of Australia | 3.63% | $182.27B |
| Woolworths Group | 2.36% | $50.81B |
| Rio Tinto Group | 5.03% | $128.45B |
| Telstra Corporation | 3.6% | $41.47B |
Sources: ASX website, Yahoo Finance
Tax implications of investing in fully franked shares
Investing in fully franked shares has a number of tax implications worth considering. While there are certainly benefits to investing in these types of shares, it is important to keep in mind any potential downsides that may end up costing you money in the long run. Here are some of the key tax implications of investing in fully franked shares:
- Reduced tax rate on dividends: One of the biggest benefits of investing in fully franked shares is that it can reduce your overall tax rate on dividends. When a company pays a dividend that is fully franked, it means that it has already paid corporate tax on that income. As a result, the dividend payment comes with a franking credit that you can apply to your personal tax return, reducing the tax you owe.
- Lower returns for low-income earners: While investing in fully franked shares can benefit high-income earners, it can actually hurt low-income earners. This is because if you earn less than the tax-free threshold, you won’t receive any benefit from the franking credits and will end up with a lower overall return compared to someone with a higher income.
- Franking credits can be refunded: If you have more franking credits than you need to reduce your tax bill, you can actually receive a refund for the excess credits. This can be a nice bonus for investors, especially those who are in a low tax bracket.
It’s also important to keep in mind that investing in fully franked shares may not be the best option for everyone. If you are looking to diversify your portfolio or are uncomfortable with the associated risks, it may be worth looking into alternative investment options that are better suited to your needs.
Below is a table outlining the impact of franking credits on investment returns for different tax brackets:
| Tax Bracket | Dividend amount | Franking credit | Net dividend | Effective tax rate |
|---|---|---|---|---|
| 0% | $10,000 | $4,285 | $14,285 | 0% |
| 19% | $10,000 | $4,285 | $14,285 | 10.5% |
| 32.5% | $10,000 | $4,285 | $14,285 | 21% |
| 37% | $10,000 | $4,285 | $14,285 | 23.25% |
| 45% | $10,000 | $4,285 | $14,285 | 24.75% |
As you can see, the effective tax rate on dividend income decreases as your taxable income increases and the amount of franking credits received also increases.
Historical trends of fully franked dividends in the ASX
For many Australian investors, fully franked dividends have become an essential aspect of their investment strategy. The benefits of owning shares that pay fully franked dividends are undeniable, particularly when it comes to tax considerations.
Over the years, the ASX has seen a significant shift towards fully franked dividends. Here are some historical trends to consider:
- In the 1980s and 1990s, it was rare for companies to offer fully franked dividends. The norm was for companies to pay partially franked dividends, with the franking rate usually hovering around the 30% mark.
- It wasn’t until the late 1990s and early 2000s that fully franked dividends became more common in the ASX. This trend was due in part to the introduction of the dividend imputation system by the Australian government, which provided tax incentives for companies to pay fully franked dividends.
- The trend towards fully franked dividends continued throughout the early 2000s, with more and more companies choosing to pay fully franked dividends. Some of the reasons behind this trend include greater awareness of the tax benefits of fully franked dividends and investor demand for shares that pay fully franked dividends.
- Following the global financial crisis of 2008, there was a noticeable decline in fully franked dividends in the ASX. Many companies chose to reduce or suspend dividend payments altogether in an effort to conserve cash. However, fully franked dividends remained popular among some companies, particularly those with more stable revenue streams.
- Since the global financial crisis, there has been a gradual recovery in fully franked dividends in the ASX. Many companies have resumed paying fully franked dividends as their financial position has improved, and investor demand for fully franked dividends has remained strong.
- Today, fully franked dividends are the norm in the ASX, with most companies paying fully franked dividends of around 80-100%. This trend is expected to continue, particularly given the ongoing tax benefits of fully franked dividends for investors.
Overall, it’s clear that fully franked dividends have become an increasingly important part of the ASX dividend landscape over the years. While there have been ups and downs in dividend payments due to economic instability, the trend towards fully franked dividends remains strong.
Are all ASX shares fully franked? FAQs
- What does “fully franked” mean?
- Are all ASX shares fully franked?
- Why do companies fully frank their dividends?
- How can I find out if a company fully franks its dividends?
- What are the benefits of investing in fully franked shares?
- What happens if a company partially franked its dividends?
- Can I still invest in unfranked shares?
“Fully franked” means that the company has already paid the Australian corporate tax rate on that portion of the dividend distributed to shareholders, so shareholders don’t need to pay additional tax on that amount.
No, not all ASX shares are fully franked. Some companies may only partially frank their dividends or not frank them at all.
Companies fully frank their dividends to provide added value to their shareholders. By fully franking a dividend, the company provides certainty around the tax treatment of the dividend, and this is well-received by shareholders.
You can usually find this information in the company’s financial statements or by looking up the dividend announcement on the ASX website. The dividend announcement will usually state whether the dividend is fully, partially, or unfranked.
Investing in fully franked shares can provide tax benefits. As mentioned earlier, a fully franked dividend means there’s no additional tax payable on that portion of the dividend. Additionally, some investors may prefer fully franked dividends because they provide a higher yield than unfranked dividends.
If a company partially franked its dividends, shareholders need to pay tax on the unfanked portion of the dividend. The tax rate for unfranked dividends depends on your individual income tax rate.
Yes, you can still invest in unfranked shares if you choose. However, you need to be aware that you will need to pay tax on the full amount of the dividend, which could significantly reduce your after-tax returns.
Closing Thoughts
We hope our FAQs have helped you understand the concept of fully franked shares. Remember, not all shares on the ASX are fully franked, so be sure to check the dividend announcement or financial statements to find out. Investing in fully franked shares can provide tax benefits, but ultimately, you need to make investment decisions that align with your financial goals and risk tolerance. Thanks for reading, and we hope to see you again soon!