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Election: What’s all the fuss about franking credits?

The Federal Election coverage of franking credits and superannuation is reaching fever-pitch as Australia heads to the polls in just a matter of days.

So what exactly are franking credits and what do any proposed changes mean for dividend-loving Fools?

Franking credits and the Aussie tax system

One of the biggest historical reasons for our love of dividends is our unique tax treatment of dividends, known as the dividend imputation tax system.

In Australia, companies distribute a “grossed-up” dividend to investors from their after-tax profits, with a “franking credit” attached which allows investors to claim back this amount on their personal income.

While the rationale is that investors don’t pay tax twice, the reality is many investors (particularly retirees) have been able to receive cash refunds from high dividend portfolios and live purely off dividends in retirement.

What could happen to those precious franking credits?

If the Australian Labor Party is elected in the Federal Election then a Labor Government is likely to strip back that cash refund benefit that retirees (and more specifically, self-managed super funds) currently can receive from their dividend-paying stocks.

Australians love dividends and the 8-10% yield offered by the likes of Alumina Ltd (ASX: AWC) and Bank of Queensland Ltd (ASX: BOQ) are hard to look past.

However, I think if companies are to try and run down their franking credit balances it could be worth looking at Wesfarmers Ltd (ASX: WES) as it embarks on its takeover spree in lieu of special dividends.

The other option is to look at high-yielding stocks that are already unfranked with Air New Zealand Ltd (ASX: AIZ) a good option in my books given its 8.6% unfranked dividend due to its international status.

All in all the election result could have implications for certain groups of investors depending on age and portfolio type, but a well-diversified portfolio should continue to deliver returns for investors in the long-term, irrespective of the outcome.

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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