Money Sapling

Fixed income – Unfranked income better than franked

The misconception that fully franked is better than unfranked income

Over the last 2 years, we have had the pleasure of dealing with hundreds of investors taking advantage of our service on the hybrids/ income securities that we have seen coming to market. You will have noticed that over time we have gradually been building up our research to provide investors with some analysis on how to compare products and where we see these sitting within portfolios. However, one of the common misconceptions has been that the fully franked income is more preferential than unfranked.We thought we would show you why.

Simply put, unlike dividends on ordinary shares where the yield quoted is plus franking (if there is any), fixed income etiquette states that the interest rate quoted is inclusive of franking. This is to allow investors to make a reasonable like for like comparison as the franking just means that 30% tax has already been paid (that you may or may not be able to claim back). Now you may argue that this means you are still receiving the same return, and you would be correct, but a bird in the hand is worth two in the bush.

Receiving the returns today rather than waiting until the end of the tax year to claim them back is a definite bonus. Regardless of whether you are a higher rate, lower rate, or nil rate taxpayer, unfranked income on fixed income products is better than franked.

We have illustrated this below with an example of investing with a 6% return and using all the funds to reinvest back in at 6%pa.

Example of franking credits

Offshore investors unable to claim franking credits

You may wonder why this is relevant, but its an important consideration. Since franking credits are a considerable make up of the returns, offshore investors are more likely to turn their nose up at franked securities. Therefore making unfranked income more attractive.

We hope that helps clarify things.

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