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How the Budget will hit your fully franked dividends

It’s not widely known or reported, but the latest Federal budget contained a hidden hit for shareholders depending on franking credits.

One budget proposal is to reduce company tax from its current 30% rate to 28.5%. The government is also proposing a ‘levy’ of 1.5% on those companies generating taxable income of more than $5 million to pay for the paid parental leave scheme. But the levy is not a tax, so franking credits will apply at the 28.5% rate.

According to Greg Vaughan from Strategic Income, a wholesale self-managed investor advisory firm, the change means an investor receiving $80,000 in dividends – including franking credits – will lose around $950 from July 1 next year.

The move is expected to affect all those companies in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XAO) and most of those in the S&P/ASX 300 Index (Index: ^AXKO) (ASX: XKO), according to Colin Lewis from IPAC.

Yes folks, that fully franked dividend from the big four banks, and the likes of Telstra Corporation Ltd (ASX: TLS), Insurance Australia Group (ASX: IAG) and Woolworths Limited (ASX: WOW) is that little bit worth less than it was before.

And while the change is likely to result in a small drop in income for most investors and retirees, it’s yet another impost on consumers who are already suffering from ‘Budget stress‘.

Investors may well be hoping the changes don’t pass through parliament. For those who still want their high, fully franked dividends, Motley Fool analysts have selected their best dividend stock for this year, and you won’t want to miss out…

 

 

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Motley Fool writer/analyst Mike King owns shares in Telstra Corporation and Woolworths. You can follow Mike on Twitter @TMFKinga

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