Question:

What is the formula to determine the total % return on a fully franked dividend?

Response:

If a dividend is 100% Franked, then for every \$30.00 of tax paid by the company, a franked dividend of \$70.00 can be paid.

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Company Profit:ย  \$100.00

Tax Paid:ย ย ย  ย ย ย  ย ย ย  \$ 30.00

Dividend Paid:ย ย ย ย  \$ 70.00

So, if a 100% franked dividend of \$1200.00 is received, the imputation credit is calculated as follows:

Franked Dividend x30/70 = \$514.29

How does Dividend Imputation work?

Firstly, let’s look at the current tax rates to work out the effects of franked dividends and imputation credits. We have retrieved this information from the Australian Taxation Office, go to www.ato.gov.au for more information.

The following rates for 2011-12 apply from 1 July 2011:

 ย Taxable Income ย Tax on this income ย \$0 – \$6,000 ย Nil ย \$6,001 – \$37,000 ย 15c for each \$1 over \$6,000 ย \$37,001 – \$80,000 ย \$4,650 plus 30c for each \$1 over \$37,000 ย \$80,001 – \$180,000 ย \$17,550 plus 37c for each \$1 over \$80,000 ย \$180,001 and over ย \$54,550 plus 45c for each \$1 over \$180,000

The above rates do not include the Medicare levy of 1.5% and are applicable to Australian Residents only. Tax offsets reduce the tax payable. Tax offsets based on taxable income levels apply to a range of circumstances. For more information please visit Australian Taxation Office website and go to “About tax offsets”

In this example we have used an individual who earns \$30,000 Per Annum.

Income ย ย ย  ย ย ย  ย ย ย  ย ย  ย  ย  ย ย ย ย ย ย  ย  ย  ย  \$30,000.00

Dividend Receivedย ย ย  ย ย ย ย ย ย ย  ย  ย ย  \$1,200.00

Imputation Creditย ย ย  ย ย ย ย ย ย ย ย  ย  ย ย  \$514.29

Total Assessable Incomeย ย ย  \$31,714

Tax on Incomeย ย ย  ย ย ย  ย ย ย ย ย ย ย ย  ย  ย  ย  \$3,857.10

Less Imputation Creditย ย ย  ย  ย  ย ย  \$514.29

Tax Payableย ย ย  ย ย ย  ย ย ย ย ย ย ย ย ย ย ย ย ย  ย ย  \$3,342.81

The benefits with imputed credits as a result of receiving Fully Franked Dividends help reduce your taxable Income, especially for individuals who pay tax at less the 30 cents in the dollar.

Before considering purchasing a share and its effect on your income, we suggest that you consult your financial planner or accountant.