Every real estate investor obsesses over two things: the monthly rental income and the massive tax bill at the end of the year. We’re always looking for ways to boost the first and legally shrink the second.
What if there was an investment income stream that came with its tax half-paid for you before it even hit your bank account?
It’s a favourite of savvy investors, and it’s called a franked dividend. Forget the scary jargon. We’re going to break down how this works using a simple pizza shop analogy and show you how it connects directly back to your passion for property.
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What is a Franked Dividend? A Guide for Real Estate Investors
A franked dividend is a distribution of profits from a company to its shareholders, on which company income tax has already been paid. It is a key feature of the Australian tax system designed to prevent the double taxation of company profits—once at the company level and again in the hands of the shareholder. This method provides a tax credit (a franking credit) to the investor, making it a highly tax-efficient form of investment income.
Key Attributes
- Dividend Payment: The cash amount distributed to a shareholder from a company’s after-tax profits.
- Franking Credit: A tax credit attached to the dividend, representing the amount of tax the company has already paid. This is the “magic coupon” that prevents double taxation.
- Tax Imputation: The system itself, where the tax paid by the company is imputed, or passed on, to the shareholder.
Franking Credit Formula
To calculate the franking credit and the total income you must declare to the ATO (the “grossed-up” dividend), you use these formulas:
1. Franking Credit Calculation:
Franking Credit = (Dividend Amount / (1 – Company Tax Rate)) – Dividend Amount
2. Grossed-Up Dividend Calculation:
Grossed-Up Dividend = Dividend Amount + Franking Credit
Calculation Example:
Here’s a step-by-step guide to calculating the tax impact of a franked dividend.
Gather your data:
- Dividend Received (Cash): $70
- Company Tax Rate: 30% (or 0.30)
- Your Personal Tax Rate (Marginal): 32.5% (or 0.325)
1. Calculate the franking credit:
($70 / (1 – 0.30)) – 70(70(70 / 0.70) – $70 $100 – $70 = $30
Your franking credit is $30.
2. Determine your grossed-up income to declare:
$70 (Dividend) + $30 (Franking Credit) = $100
You must declare $100 of income on your tax return.
3. Calculate the tax you owe on this income:
$100 (Grossed-Up Income) * 0.325 (Your Tax Rate) = $32.50
Your initial tax bill on this income is $32.50.
4. Apply the franking credit:
$32.50 (Tax Owed) – $30 (Franking Credit) = $2.50
The final tax you pay out of pocket is just $2.50.
Why are Franked Dividends Important for Investors?
Franked dividends provide significant benefits for investors, particularly those focused on building tax-effective income streams to complement assets like property.
- Prevents Double Taxation
The primary benefit is fairness. Without the franking credit system, company profits would be taxed at 30%, and then the remaining amount would be taxed again at your personal rate. Imputation ensures the same dollar of profit is only taxed once. - Boosts After-Tax Returns
Because the franking credit reduces your final tax bill, the effective after-tax return on your investment is higher than it would be from an unfranked dividend or other income sources like interest—especially when compared to cash flow from rentals. - Creates Tax-Effective Income Streams
For a real estate investor focused on cash flow, franked dividends represent a parallel income stream that is highly efficient from a tax perspective, working alongside your net rental income. - Potential for Tax Refunds
If your personal tax rate is lower than the 30% company rate (e.g., if you are in a low-income bracket or in retirement), the ATO will refund the difference to you in cash. The franking credit can become a source of tax refunds, boosting your cash-on-cash return.
How Franked Dividends are Used in Finance: Real-World Applications
Franked dividends are a cornerstone of many Australian investment strategies.
- Building a Diversified Share Portfolio
Investors deliberately select shares in established, profitable Australian companies (like major banks, miners, and retailers) known for paying consistent, fully franked dividends to generate a steady, tax-advantaged income. - Investing in Real Estate Investment Trusts (REITs)
This is the key link for property investors. REITs are companies that own large portfolios of commercial, industrial, or retail property. When you buy a share in a REIT, you are buying a piece of this portfolio. The distributions (dividends) from many Australian REITs are partially or fully franked, allowing you to invest in property while receiving a tax-effective income stream.- Case Study Example: An investor wants exposure to large-scale shopping centres without the capital outlay. They buy shares in a REIT that owns these centres. The REIT pays a distribution of $1,000, which includes a $200 franking credit. The investor benefits from the property’s performance and receives a highly tax-effective income.
- Superannuation and Retirement Planning
Franked dividends are particularly powerful in the superannuation environment. When a super fund is in the “pension phase,” its earnings are tax-free. This means the fund receives the full value of franking credits back from the ATO as a cash refund, significantly boosting retiree returns, significantly boosting retiree returns and supporting generational wealth.
Alternatives to Franked Dividend Income
While franked dividends are powerful, they are just one type of investment return.
| Metric | Description | Best Used For | Key Advantage | Key Limitation |
| Unfranked Dividends | A dividend payment where no company tax has been paid (e.g., from overseas profits). | Gaining exposure to global companies or those with tax losses. | Can still provide strong cash flow. | The investor must pay the full marginal tax rate on the income. |
| Rental Income | Income generated from leasing out investment property. | Generating regular cash flow from a tangible asset. | Asset is under your direct control; potential for negative gearing benefits. | Illiquid, high entry costs, requires active management (tenants, maintenance). |
| Capital Gains | Profit made from selling an asset (shares or property) for more than its purchase price. | Long-term wealth creation and growth. | Only taxed upon sale; eligible for a 50% discount if held over 12 months. | Provides no regular cash flow until the asset is sold. |
Common Pitfalls and Limitations
- Not All Dividends are Franked
Investors may mistakenly assume all dividends from Australian companies are franked. Always check if a dividend is fully franked, partially franked, or unfranked, as this dramatically changes the after-tax outcome. - Investing Solely for Franking Credits
Don’t let the tax tail wag the investment dog. Chasing a high franked dividend yield from a poorly performing company is a bad strategy. A capital loss on the share price can easily wipe out any benefit from the franking credit. - Relevance for International Investors
The franking credit system is specific to Australian residents for tax purposes. Non-resident investors typically do not receive the benefit of franking credits.
FAQs: Franked Dividends
What does YOY stand for in finance?
Franked Dividend is an investment term for a shareholder dividend that has had company tax paid on it.
What does ‘fully franked’ mean?
This means the company has paid the full 30% corporate tax rate on the profit before paying you.
Is a franking credit a guaranteed cash refund?
No. It’s a tax credit. It only becomes a cash refund if your personal tax rate is less than the company tax rate paid.
Conclusion
Incorporating an understanding of franked dividends into your financial toolkit provides a powerful advantage, especially as you look to diversify beyond direct property. This tax-effective income stream can complement your rental returns and accelerate your wealth-building journey. By understanding how these credits work, you can make more strategic financial choices for the long term.
