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Here's the truth about tax and franking credits




About John

I'm a financial adviser/investor of 25 years, specialising in minimising the impact of black swan events. Black swan events such as the GFC can be devastating and very difficult to predict.


The media is guilty of presenting a warped view of the world when it comes to investors in account-based pensions.

There have been serious concerns expressed in major media about investors in account-based pensions (they apply to other vehicles as well, but most of the rantis have been about pensions).

Ranty, fear-based media reporting can lead to a very warped view of the world.

Ranty, fear-based media reporting can lead to a very warped view of the world. Picture: iStock

The “concern” goes like this: “Because a lower company tax rate will mean companies are paying lower tax, they will have fewer franking credits to pass on and investors will get smaller tax refunds.”

Read more from John Cameron: Wanted: A better way to measure investment risk

Oh, save me. There is a serious misunderstanding here!

Sure, if you look at franking refunds in isolation, this holds true. But the problem with the above rant lies in the rest of the story. If something is part of a much bigger whole, and you pull it out and treat it in isolation (which has happened here), you get a very warped view of the world.

Let’s look at the whole:

  • Franking (tax) credits are for tax paid. Lower tax and you lower the tax refunded. So far, so good.
  • But if you lower tax, companies will have more profit to distribute as dividends. By exactly the same amount as the tax reduction.
  • Thus, a reduction in tax can be offset by an increase in dividends.
  • Finally, a reduction in tax will leave companies with more to invest in their businesses, grow their companies and pay bigger dividends in the future.
  • This as a very different picture from that generated by the rant. A positive, rather than a negative.

    Before I forget, tax refunds of this kind are not a free kick for investors. They are a refund of tax paid, and must be then included in the investor’s taxable income.

    Where the tax rate is zero, as in charities and pensions, the result is nothing more to pay.

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