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Are your fully franked dividends safe?

SMSF investors love fully franked dividends, and with good reason.

Franking credits are a tax offset. They can be used to directly offset the amount of tax you have to pay on your income, and can even produce a net refund if you pay tax at a lower rate than the company rate.

Which Australian share market investor doesn’t like to get one-over the taxman?

The AFR reports Treasury may tinker with the dividend imputation system, thanks to comments from David Murray in his interim report of the financial system inquiry.

Naturally, stock market investors are unimpressed. Not only would they lose their tax break, but it would be highly likely the share prices of some of the ASX’s biggest, and most popular stocks, would take a severe hit.

The Australian Shareholders’ Association Stephen Mayne quantified the potential effect, saying in the same AFR article…

“You would see big four banks and companies like Coles (owned by Wesfarmers Ltd (ASX: WES)) and Woolworths Limited (ASX: WOW) have tens of billions of dollars wiped off their value”

You could easily add stocks like Telstra Corporation (ASX: TLS) and Insurance Australia Group Limited (ASX: IAG) into the mix too — both popular stocks, paying fully franked dividends. One thing would seem certain — Telstra shareholders could kiss the road to $6 away if the dividend imputation system was scrapped.

Mr Mayne went on to say the dividend imputation system is fully priced into ASX shares, meaning if it was scrapped, “it would cause carnage among self managed superannuation funds.”

The government is very unlikely to suddenly alienate thousands of ASX investors, or cause a sudden self-made stock ASX-only stock market crash. The damage to the S&P/ASX 200 Index would  likely be in the thousands of points.

The bottom line is investors can happily continue their love affair with ASX dividend paying stocks. Governments do silly things, but when it comes to knowing who butters their bread, they’re not stupid.

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