Income in the context of shares, refers to periodic dividends, while franking credits are tax credits accompanying those dividends reflecting the tax already paid by the issuing company on its profits.
For Australian investors, franking credits are important as they prevent double taxation on dividends: once at the company level and again at the investor’s level. Depending on one’s risk appetite, a dividend-paying stock with franking credits can be an attractive proposition, particularly when using a low-tax paying vehicle such as a self-managed superannuation fund.
As an example, if an investor receives a fully franked dividend of $700 and a franking credit of $300, they report a total income of $1,000 for tax purposes. However, the $300 credit can be used to offset their tax liability and in the case of a self-managed superannuation fund with a tax rate of 15%, they are eligible for a refund of $150, or this can be used to offset other tax liabilities.
