Today is 26 June, which means that tax time is right around the corner. Here in Australia, we are able to file our tax returns for the financial year just gone on 1 July. Most people do just that, anxious to receive that converted tax return that can feel like an annual bonus from the Australian Tax Office (ATO).
Around this time of year, there are more than a few vested interests seeking to 'help' your return. There are stores offering some sweet deals in EOFY sales and charities seeking extra donations that you can claim. Today, I'm going to discuss a way you can boost your ATO refund (or bill if you're less fortunate) that is a little more one-sided in its benefits.
To be fair, it still requires one to spend money. But only on investments that will, hopefully, return even more cash your way.
Receiving franking credits from ASX dividend shares
In Australia, most of the ASX shares you can buy on our stock market will pay you a regular dividend. Name any public company you can think of, and this will probably be the case. That's everything from Commonwealth Bank of Australia (ASX: CBA), JB Hi-Fi Ltd (ASX: JBH), and Woolworths Group Ltd (ASX: WOW), to Westpac Banking Corp (ASX: WBC), TPG Telecom Ltd (ASX: TPG), and Bega Cheese Ltd (ASX: BGA).
Receiving dividends from an investment is itself a beautiful thing. Dividends require nothing except ownership of the shares. That means they represent passive income in its purest form.
But receiving dividends in Australia can come with another benefit too – franking credits.
Franking credits are, in effect, receipts for taxes already paid. When a company declares a dividend payment for shareholders, it must fund this dividend out of its already-taxed profit pool. When we, as shareholders, receive this dividend, we have to declare it as income on our own tax returns.
This effectively means that dividends are taxed twice before arriving in our bank accounts – an inherently unfair situation. To remedy this, if a dividend comes from a pool of profits that the ATO has taxed, the companies are allowed to deliver them with franking credits attached, reflecting the tax paid.
Lower your tax bill in 2025
When tax time comes around, we can then hand these franking credits to the ATO, which allows us to claim the corporate tax already paid as a deduction for our own personal income taxes. This situation makes franked dividend income one of the most tax-efficient forms of income we can receive. If you receive wages, salaries, or interest from bank savings accounts, term deposits or bonds, you'll have to pay your full rate of tax on this income. But for a fully-franked dividend, you will get a tax break.
Most dividends come with what's known as 'full' franking. That means the profits that funded the dividends have been wholly taxed by the ATO. If that's so, each $100 in dividends received will usually come with around $43 worth of franking credits you can claim as a deduction. That's assuming the top corporate tax rate of 30% applies.
But this is not always the case. Some investments, such as real estate investment trusts (REITs), don't have to pay corporate taxes. As such, their dividends (also known as distributions) don't typically come with franking credits.
Other companies have operations beyond our shores, and, as such, pay their taxes to other tax offices, not to the ATO. If this is the case, dividends from these companies often come unfranked, or might come partially franked if some, but not all, of the profits are domiciled in Australia.
So, if you want to lower your tax bill this tax time, buy some ASX shares that pay fully franked dividends. The Treasurer won't thank you, but your bank account will.
