Why frank is a retirees financial friend

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FRANKING credits is a funny-sounding name, and for retired Australians they deliver an equally-amusing noise: Ka-ching.

Thats because these tax credits, handed out with dividends from many Aussie companies shares, deliver an extra income boost of up to 43 per cent for people on low and zero tax rates.

And with tax rules allowing retirees over age pension age to earn up to $28,974 each tax-free every year, its some handy extra income.

Fully franked dividends are dividends paid by companies that already paid the 30 per cent company tax rate to the Australian Taxation Office. To avoid double-taxing of dividends in the hands of investors, the tax credit gets transferred to them.

An average wage earner on the 32.5 per cent marginal tax rate pays just 2.5 per cent tax on the dividends they receive, while a super fund or retiree on a zero tax rate gets extra money via a tax credit.

Every dollar of franked dividend received is worth $1.43 for an investor or super fund on a zero per cent tax rate, says Catapult Wealth financial adviser John Lawler.

It gives you the ability to increase your returns, he says.

For example, the Commowealth Bank last week paid a dividend of $1.98 per share, representing a yield of 5.6 per cent. For a low-income retiree, that payment is effectively worth $2.83 per share for a yield of 8 per cent.

Super funds in the pension phase also pay zero tax, but Lawler warns that not all of them distribute franking credits directly to members.

Some funds arent as transparent, he says. A fund does its own tax return and some may take franking credits and spread them out to smooth investment returns. If you are in a managed option you are giving up control.

Franking credits are usually refunded through a tax return, but if you do not need to lodge a tax return, you can get them using ATO form. Search for ato franking credits refund form online.

It is not too late to claim a refund of franking credits you received in the 2001 to 2014 income years, the ATO says.

If you have not already claimed these credits, go to ato.gov.au and order an application for the relevant years.

While volatility makes shares risky in the short term, Lawler says they remain a good hedge against inflation. By putting all your money in bank deposits you are guaranteed to lose money in the long run, he says.

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