Franking credits are terms that are usually associated with the business sector.
It is simply a subsidy that large companies provide their shareowners in respect to the annual revenue generated.
It is usually practiced in Australia and many western countries as a way to evade the imposition of tax on the same assets at different periods. It comes as an incentive to promote long-term shares ownership and generates a strong appeal by the public for the company’s shares.
These credits are paid to the shareowners either in the form of reduced taxation on their income or a total refund depending on their taxation brackets. Fortified with a basic understanding of what franking credits are, it is time we delved into a description of how they work.
How Do They Work?
There is an ongoing rush in the purchase of assets in countries that practice franking credits.
This is because asset holders now have the opportunity to receive subsidies on their investments in indigenous businesses.
It is a terrific approach for major establishments in Australia to promote long-term investments which in turn has increased the payment of subsidies to the shareowners.
In Australia, they are only viable for shareowners who are within the taxation brackets of zero to thirty percent.
The amount of franking credits paid is in comparison to the shareowner’s taxation bracket.
A shareowner within the least taxation bracket receives a total refund for their taxes. It is safe to say the higher your taxation bracket, the lower the subsidy you receive. Subsidies are not paid to shareowners whose taxation brackets are higher than thirty percent.
Why Franking credits were introduced
It is a common practice to own shares in Australia as statistics have it that 1/3rd of the population are all shareowners. For years, the subsidy paid to shareowners by the company was taxable, the Australian government after much consideration, took to notice that it was a flaw.
Why was this so? You may ask, this is because the company pays tax before crediting the subsidy to the shareowners and this meant they were charged twice, and it wasn’t right.
So the government in conjunction with a team of experts, found a way around it and introduced Franking Credits. This move turned Australia into a safe haven for shareowners.
The Holding Period
In most nations this is a prerequisite to receiving your franking credits. The period varies from nation to nation. The official holding period in Australia is 45 days.It is a compulsory criterion for receiving franking credits together with providing information on the transaction.
The franking credit together with the subsidy received from the company accounts to the shareowner’s total income. The term “grossed-up dividend” refers to the sum of the shareowner’s subsidy and their franking credits.
This introduction will definitely increase the number of shareowners in any country it is practiced. This is because not only is it good for big shareowners, it ensures that small shareowners are not left out giving them the opportunity to re-invest their subsidy. So ideally, there are calls for other western nations to introduce the model as it would promote an increase in investment in any nation practicing franking credits.