Aspirations Insights: July 2024

AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated. We aim to help investors cut through all the media noise and hype and understand what is really driving investment markets and portfolio returns.

In this edition, we cover:

  • What are franking credits?
  • How does AW use franking credits in client portfolios?
  • Immigration – driving house prices up?

What are franking credits?

A franked dividend is when a company pays dividends to investors with after-tax income. This means that the company has already paid tax on that income. When they do this, the investor receives a tax credit.

At tax time, investors only need to pay tax on the dividend if their marginal tax rate is higher than the company’s tax rate (normally 30%). If the investor’s marginal tax rate is lower, they may be able to claim a refund of the tax.

The purpose of franking credits is to prevent double taxation, where the same income is taxed both at the company level and again as personal income when received as dividends. 

Franking credits are a unique element of the dividends paid to investors who own Australian share investments. 

How does AW use franking credits in client portfolios?

AW utilises franking credits to maximise the tax efficiency of the portfolio and enhance the income being received across superannuation, pension and investment portfolios.

Superannuation Portfolios: Within the superannuation phase, dividends and earnings are taxed at a rate of 15%. Franking credits offset this 15% tax, reducing the overall tax liability. This reduction allows the tax savings to be reinvested, enhancing the growth of the superannuation portfolio.

Pension Portfolios: Within the pension phase, dividends and earnings are tax-free, allowing franking credits to be refunded to the investor at the full rate. This provides an additional source of income, boosting the overall returns from the pension portfolio and enhances the stability and sustainability of your retirement income.

Investment Portfolios: Within investment portfolios, dividends and earnings are subject to the investor’s marginal tax rate. If the investor’s marginal tax rate is higher than the company’s tax rate (normally 30%), tax will need to be paid on the dividend. However, if the investor’s marginal tax rate is lower, they may qualify for a tax refund. Thus, franking credits play a crucial role in optimising tax outcomes for investors.  

Immigration – driving house prices up?

Australia is a popular destination for people looking for a better lifestyle, a promising economic future, advanced healthcare and a welcoming community. Every year, a large population of international students and skilled workers visit Australia to live, work, or study in the country. Simultaneously, many Australian residents also travel abroad for various purposes. 

In recent years, there has been a notable increase in immigration to Australia compared to emigration (moving abroad), altering the country’s demographic landscape and affecting the balance between incoming and outgoing migrants. This demographic shift has contributed to rising house prices and rents.

The current challenge in Australia is the insufficient number of building approvals to keep pace with the rising immigration rates. The chart below depicts the disparity between building approvals and population growth in Australia. Population growth has surged while building approvals have not kept pace. This mismatch is a significant factor driving both house prices and rents.

The chart below illustrates the growth of house prices in various Australian capitals throughout 2023.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.