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If your investment goals include income, it's reasonable to assume that it's better to be paid $1 of franked dividend than $1 of unfranked dividend - since the after-tax value of a franked dividend in the hands of an investor is higher than an unfranked dividend.
Franking avoids the double taxation of company profits, by giving you a rebate for the amount of your dividend on which the company has already paid tax.
In effect, the company pays the tax for you on a proportion of your dividend - a "franking credit". You can increase your exposure to franking credits in three ways:
| Strategy |
Definition |
How it works |
| 1. Invest in shares that pay high levels of franked dividends |
The level of franking varies between companies and from year to year |
By investing a greater proportion of your portfolio in shares that tend to pay high partly franked or fully franked dividends, you can increase tax-efficiency. |
| 2. Use a margin loan to buy shares that pay franked dividends |
A margin loan is a way of borrowing to invest in a portfolio of shares and managed funds |
You increase the size of your portfolio, and increase the amount invested in shares that pay franked dividends. |
| 3. Buy instalment warrants over shares that pay franked dividends |
Instalment warrants are a way of borrowing to invest in shares
You pay a fraction of the share price upfront and borrow the rest
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You get exposure to all the dividends and potential franking credits from the shares, without paying the full share price upfront. |
Why this strategy can work
When individual investors receive franked dividends:
- both the dividends and the imputation credits are included in your assessable income
- you are entitled to a rebate equal to the amount of the imputation credit
- you can use your rebate to offset your income tax
- you can receive excess franking credits as a cash refund.
Macquarie investment options to suit this strategy
Macquarie gives you a choice of products to help execute this strategy:
This advice has been prepared by Macquarie Equities Ltd [ABN 41 002 574 923] and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.
For information relating to our financial services you should refer to the Macquarie Equities Ltd Financial Services Guide.
This material has been prepared based on information believed to be accurate at the time of publication. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information.
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