Why some investors receive extra value from their dividends
Many Australians invest in shares to generate income, particularly during retirement.
But have you ever looked at your tax return and noticed a benefit connected to your investments? Or wondered why Australian shares are often discussed when talking about retirement income? The answer is often franking credits.
Franking credits can improve the after-tax return from certain investments. For some investors, particularly retirees, they can provide a meaningful benefit. However, the most important thing to remember is:
A good investment strategy is not built around franking credits alone, it is built around your goals, your lifestyle and your long-term financial plan.
What are franking credits?
When Australian companies make profits, they pay tax on those profits. If the company distributes some of those profits to shareholders as dividends, it can attach a franking credit to represent the tax already paid. This helps prevent investors from being taxed twice on the same income.
Put simply:
The company has already paid tax, and the franking credit allows shareholders to receive recognition for that tax paid.
A simple example
A company earns $100 in profit.
- It pays $30 tax.
- It distributes the remaining $70 as a dividend.
- The shareholder receives a $70 dividend plus a $30 franking credit.
The investor is treated as receiving $100 of income, with the $30 franking credit available to reduce tax payable. The final outcome depends on the investor’s individual tax position.
Why can franking credits be valuable in retirement?
Retirement often changes the way investment income is taxed. Many retirees have lower taxable incomes compared with their working years. Some investments held through superannuation pension accounts may also have different tax outcomes.
Because of this, franking credits may help improve the after-tax income received from Australian shares. For the right investor, this can make a meaningful difference.
Does this mean you should invest more in Australian shares?
Not automatically. This is where good financial planning is important.
A common mistake is choosing an investment because of the tax benefit without considering the bigger picture.
For example, an investor may focus heavily on fully franked dividends but end up with:
- Too much exposure to Australian companies
- Too much exposure to certain industries
- Less diversification across global markets
A strong portfolio is designed around your objectives, not one feature of the tax system.
Income is only part of the investment equation
When planning for retirement, we look at more than just the income an investment produces.
A successful strategy considers:
Income
How much cash flow your investments provide.
Growth
The ability for your investments to increase in value over time.
Risk management
Ensuring your portfolio can support your lifestyle through different market conditions.
Could franking credits change in the future?
Franking credits have been part of Australia’s tax system for many years. However, tax rules and Government policies can change. This is why retirement planning should not rely on one benefit continuing forever. The goal is to build a strategy that remains suitable even as circumstances change.
The key message
Franking credits can be an important benefit for many Australian investors, especially retirees.
But the best outcomes come from looking at the complete picture:
- Your retirement goals
- Your income needs
- Your tax position
- Your investment mix
- Your long-term plans
Tax benefits are valuable, but they should support your investment strategy, not drive it.