Shareholders of Flagship Investments Limited (ASX: FSI) would be aware of Flagship’s long-term performance record.
LIC Specialist Bell Potter released their 2020 report into LICs noting the Share Price performance of LICs within their research universe. Their tables identify that Flagship Investments outperformed all peer Large and Medium cap focussed LICs overtime periods 1 year, 3 years, and 5 years- validating the investment philosophy of the portfolio manager EC Pohl & Co and the skills of the investment team.
Flagship’s 3 Year and 5 Year returns of 17.9%pa and 15.7% pa are more than double the average return of peer Large, Medium, and Small-cap investing LICs.
Source: Bell Potter LIC Report February 24 2021.
Flagship has delivered a strong performance to shareholders since it first listed in December of 2000. Bell Potter LIC/ ETF Specialist Hayden Nicholson recently interviewed Dr Manny Pohl AM to discuss the Company, its investment team, and the processes that have generated this consistent outperformance.
The interview can be viewed at the link below and for your convenience, we provide timestamps to the conversation:
Access the full report by contacting the author:
Hayden Nicholson, ETF/LIC Specialist: hnicholson@bellpotter.com.au
Bell Potter Securities Ltd: Level 29, 101 Collins Street, Melbourne: www.bellpotter.com.au
To work out what portion of your dividends are franked, you must calculate the franking percentage. This is calculated by dividing the franking credit amount distributed by the maximum franking credit amount the company is allowed to issue with each dividend. This calculation is commonly represented by the following formula:
(franking credit amount distributed ÷ maximum franking credit amount) x 100%
Example:
On the 30th of June 2020, ABC Ltd distributes $100,000 in dividends to its shareholders. Alongside this $100,000, ABC Ltd also allocates franking credits of $10,000. However, the maximum franking credit they are allowed to issue is $20,000.
To calculate the franking percentage for these dividends, we’ll use the formula listed above.
($10,000 ÷ $20,000) × 100% = 50%.
Therefore, the franking percentage for the dividends distributed by ABC Ltd is 50%
To calculate your franking credit amount, you’ll need to use the following formula:
((dividend amount ÷ (1 – company tax rate)) – dividend amount) x franking percentage.
Let’s use ABC Ltd as an example again and say you are paid a franked dividend of $100. As an Australian-based company, ABC Ltd’s company tax rate would be 30%. Using the above formula, we will calculate the franking credit amount as follows:
(($100 / (1 – 0.30)) – $100) x 0.5 = $21.43
This makes the franking credit amount attached to each dividend $21.43, and the total dividend amount received is $121.43.
If the dividend received from ABC Ltd was fully franked, you would do the following calculation:
(($100 / (1 – 0.30)) – $100) x 1 = $42.86
This fully franked dividend calculation would make the franking credit amount $42.86 for each dividend, making the total dividend amount received $142.86.
Dividends can be a great way to generate a regular income from your investments. However, even if your dividends are fully franked, you may still have to pay tax on them like you would any other form of income. Your dividend tax obligations depend on your marginal tax rate.
As a shareholder, when you fill out your annual tax return, you’ll need to include the dividend received plus the franking credit. You’ll then receive a tax credit for the value of the franking credit.
If your marginal tax rate is over 30%, this credit can be used to offset the amount of income tax you are required to pay. If your marginal tax rate is under 30%, this is when you may be entitled to a tax refund from the ATO.
Ultimately, it is important to speak to your accountant or financial adviser to understand the tax implications of your dividends.
Investors adore them, politicians debate them, and we love to discuss them — Franking credits can offset your tax and benefit your income, making them a mainstay of the Australian taxation system since 1987. However, there continues to be an air of confusion surrounding their purpose and the exact impact they have on an individual’s personal income.
At Flagship Investments, we’re here to give you all the information you need so you can understand your franking credits and manage your finances with ease.
Franking credits were put in place as a result of dividend imputation, which was implemented in the 80s as a way to end the double taxation of company profits. Under this new system, tax paid by companies was attributed or “imputed” to investors, making Australia the first country to introduce a dividend imputation regime.
As we know, dividends are a portion of a company’s earnings that they issue to their shareholders as a reward. Since dividends are classed as a form of income by the Australian Taxation Office (ATO), you would normally pay tax on them the same way you would on your salary.
However, this would result in this money being taxed twice by the ATO. Thankfully, dividend imputation has prevented this from happening, and this is where franking credits enter the picture.
When thinking about franking credits, it’s easiest to view them as a form of compensation given to investors by the ATO. Before an Australian-based company distributes its profits to shareholders as dividends, it must first pay a 30% tax on said profits. Once the tax has been paid, they can distribute the amount left over to their shareholders as dividends.
However, because these profits can be classed as income for both the business before distribution and the shareholder after distribution, there’s a risk of the money being taxed twice.
To prevent this, for every dividend a company distributes, they also issue a franking credit to offset the additional tax that their shareholders would otherwise have to pay. These are called franked dividends, and issuing them ensures company profits aren’t taxed twice. This credit amount is calculated using a franking credit rate equal to the company’s applicable tax rate from the financial year the dividends were paid.
As well as preventing double taxation, these franking credits can provide shareholders with additional income tax benefits. This means that a fully franked dividend can lower your assessable income tax and may even entitle you to a refund from the ATO.
Even though your franked dividends are not subject to the same tax payments as other forms of revenue, it’s important to remember that they are still classed as a type of income. As such, you still need to declare them as part of your total taxable income when you file your tax return.
Once you have declared your franked dividends, you can then apply for a refund by filling out the franking credit form provided by the ATO. However, it’s worth bearing in mind that in order to be eligible for this franking tax offset, you must abide by the 45-day holding period rule.
This rule states that you must have continuously held your shares ‘at risk’ for a minimum time period of 45 days (this can extend up to 90 days for some preference shares) to receive your franking tax offset.
Ultimately, it all comes down to how your marginal tax rate measures up against the dividend franking credit rate. If your dividends are fully franked, and your marginal tax rate is between 0-30%, you can gain some or all of your franking credits back as a refund.
However, if your marginal tax rate is over 30%, it’s unlikely you’ll be eligible to use your franking credits to receive a refund. Instead, your franking credits will act as a discount towards your income tax. In these circumstances, the franking credit amount will be deducted from your tax rate, so you are only required to pay tax on the difference.
Under the current scheme, Australian shareholders are able to use franking credits to potentially reduce their own tax or obtain the credits as a monetary refund if no tax is payable.
It’s worth bearing in mind, though, that the legislation surrounding the reimbursement of excess franking credits is periodically reviewed. Due to this, it’s a good idea to check the ATO’s website from time to time to ensure you’re up to date with any new regulations surrounding company tax rates and franking credits.
If you’re keen to learn more about franked dividends and how to calculate your franking credit rate, check out our Definitive Guide to Franked Dividends.
Please note: The information contained is general and does not constitute legal, taxation, or financial advice specific to your circumstances. For further details about franking credits and how they affect your tax obligations, consult with your accountant or tax advisor
Flagship Investments Limited (FSI), ABN 99 080 135 913, is a unique ASX-listed invested company as the Manager is only remunerated on investment outperformance.
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