Not tax advice ... but a simple way of explaining it for you.
When you receive the fully franked dividend, you get a credit for the 30% company tax already paid. This credit can reduce the tax you have to pay on your dividend income by bringing it in line with your personal tax rate. You can claim a tax refund if your personal tax rate is less than 30%.
For example, let’s say a company earns a profit before tax of $2.50 per share. The company tax rate is 30%, so it will pay 75 cents per share in tax to the government and send investors a cash dividend of 175 cents per share, plus a franking credit for the 75 cents of tax paid to the government.
An investor needs to declare the combined $2.50 of income on their individual tax return. The franking credit acts as a tax offset against tax that would otherwise be payable on that income by the investor.
If the investor’s marginal tax rate is less than 30% — for example, 19% — they will be eligible for a rebate of the difference. If their marginal tax rate is higher than the company tax rate — for example, 37% — they will need to pay tax on the difference.
For the investor, it is as if the dividend has been paid out of pre-tax profits and is then taxed at their marginal tax rate.
Note: Andrew Cole will not follow OZ’s Carrapateena and Prominent Hill mines into BHP’s ownership; he confirmed via a spokeswoman this week that he would not be joining BHP and would instead “take a break”. [AFR article from this morning, in case you missed it]
Cheers
These are only my thoughts and it does not constitute investment advice. Before acting on any information you read and before making any financial or investment decisions, you should always consult your advisor(s) or other relevant professional experts.
OZL Price at posting:
$28.19 Sentiment: Hold Disclosure: Held
