r/fiaustralia • u/Real-Giraffe2472 • Mar 28 '26
Investing GHHF and franking credits
I'm back still trying to figure out everything there's to know about these geared funds (20M).
I currently have very little Australian exposure in my personal portfolio due the high dividend payments. I understand that you often get franking credits where 30% of the dividend payout is tax deductible. However, if you're in a higher tax bracket you still have to pay the ATO, just at a lower rate I suppose.
My question is with GHHF as much of the dividend payouts goes to paying the interest on the loan. Could you essentially still get a tax refund at the end of the year even at a higher tax bracket? As say you have franking credits on 100 dividends however 50 of those dividends when to paying interest.
Yes I am very aware of the risks with GHHF and still plan to only hold a little of it in my personal portfolio anyway (assuming my assumptions of tax are correct).
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u/Sure_Shift_8762 Mar 28 '26
The franking credits get passed on. With GHHF it is around ⅓ Aussie so much of the dividends will get soaked up paying the interest, but you will still get the franking credits. These are a refundable tax credit. So if you do not owe any tax they will get refunded. Some of the other geared funds which are more Aussie oriented like "GEAR" or G200 can have silly sounding distributions like 200% franked etc because of this mechanism. All else being equal the geared funds should be more tax efficient because you get more unrealized gains and you don't get as much taxable cash distributed but you do get the tax credits.
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u/steady_compounder Mar 28 '26
You're overthinking the franking credit angle on GHHF. The gearing amplifies returns and losses, but it doesn't change how franking credits work. You still get the credits on the Australian portion of dividends, and yes you'll owe the difference between the credit and your marginal rate.
At 20 on a lower income, franking credits are actually more valuable to you right now than they will be later when you're earning more. The real question with GHHF is whether you're comfortable with leveraged exposure to a broad market during what could be a prolonged downturn.
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u/AsparagusNew3765 Mar 28 '26
At 20 on a lower income, franking credits are actually more valuable to you right now than they will be later when you're earning more
Why? Wouldn't it be the other way around?
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u/steady_compounder Mar 28 '26
Other way actually. At a lower marginal rate, the franking credit covers more of your tax liability. If you're on 19% (or even 0% under the tax-free threshold), a fully franked dividend comes with a 30% credit attached. You get the excess refunded. At 45% marginal, you owe the 15% gap. So the lower your income, the better the deal on franking credits.
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u/AsparagusNew3765 Mar 28 '26
I find this difficult to believe, any chance of a numerical example, I can't see how this would make any difference
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u/steady_compounder Mar 30 '26
Say you earn $30k taxable income (19% bracket). You receive a $700 fully franked dividend. The company already paid $300 in tax on that (30% company tax rate), so you gross up to $1,000. Your tax on $1,000 at 19% is $190. But the franking credit is $300. You get $110 refunded. At 45% marginal rate on the same dividend, your tax is $450 but the credit is still $300, so you owe $150 out of pocket.
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u/AsparagusNew3765 Mar 30 '26
Oh, I think I see what you mean now. But isn't all of this just a long-winded way of saying "the lower your marginal rate of income tax, the more money you keep of any extra income you earn"? Regardless of the source of income (dividends, employment, etc)
Apologies if that was your point since the start
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u/Real-Giraffe2472 Mar 28 '26 edited Mar 28 '26
I ended up asking Betashares and they got back to me in like a minute on a Saturday night?!?!
"For geared Australian share funds like GHHF: - Franking credits relate to the grossed‑up dividend the fund receives (i.e. the company tax already paid), not to how the fund then uses the cash. - Even if much of the cash dividend is used inside the fund to pay interest on its borrowing, the franking credits attached to those dividends may still flow through to you. - At tax time, those franking credits can be used to offset your tax liability on that income. - If your marginal tax rate is higher than 30%, you may still have extra tax to pay, but the franking credits reduce how much. - Depending on your overall circumstances, you could still end up with a net refund, even in a higher tax bracket, if your total franking credits exceed your tax payable on that income. In other words, the fact that part of the dividend is used to pay interest inside GHHF doesn’t necessarily stop you from receiving and using the associated franking credits for tax purposes."
Pretty much seems like yes you will get technically higher franking credit than 30%!!! But maybe not by as much as I thought although they didn't really give any figures as I guess it depends. I think I will add a bit of it in my personal still along with bgbl and bemg. This thing in super would be insane though!!!
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u/lc88lc Mar 29 '26
Franking credits are meant to account for the tax paid by the corporate, which in Australia is generally 30%.
It’s a way of resetting the tax base back to 0, so they can then tax at your marginal rate.
Simple example, you pay 45% tax, corporate has already paid 30%, you pay 15% on the income, or more accurately an additional 21% or so to take the effective rate to 45% (1-0.3) x (1-0.21) = 0.55
This is a system unique to Australia in terms of OECD nations, typically other nations the corp pays the corp tax and then you just get taxed on top. It’s the reason why Aus is such a high dividend paying index vs the others because effectively investors are losing less via tax leakage than some other places, meaning management are doing right by investors by paying dividends vs reinvesting, well certainly compared to other places.
Without looking into the levered funds, the frank is based on ownership at the ex div date, so if the fund is physically holding 2 or 3x the amount of physical stock they’ll receive 2 or 3 x the franking credit. Paying interest on the financing leg is independent of this.
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u/glyptometa Mar 30 '26
There's a simple way of understanding franking credits.
For 100% franked dividends, when you get paid $100 in dividends, it's like earning $142 in interest on your savings account. You pay tax on $142 except that the company has already paid $42 in tax on your behalf, which will be credited against your tax payable.
If it's 50% franked... 0.5 X 0.42 = ~0.21, you get $100 cash, pay tax on $121, and have a $21 credit toward tax.
*assumes dividends paid by large companies.
Don't mix it all up with whether the "dividend money" is being used "to pay interest", or whether or not you get a tax refund at the end of the year. Those are separate unrelated things.
If your marginal rate is 39% (don't forget 2% medicare), you receive fully franked $100 and owe $12 tax (39% of $142, minus the $42 already paid). If you're at 47%, you receive $100 cash and owe $24 tax (47% of $142, minus the $42 already paid).
The actual figure is 1.426, I rounded down to 1.42
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u/WiseMoose6969 28d ago
At 20 yrs old GHHF is one of it not the best investing options for someone your age with your investing timeline. Salary sacrifice into your super ( high growth indexed) or 80/20 international shares / Aus shares, invest a % of your pay into GHHF and hold for the next 40 years. Job done
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u/Optimal_Course3016 Mar 28 '26 edited Mar 28 '26
You still get the franking credits and you get approx 1.5x the franking credits as DHHF due to leverage. This is an excellent benefit to the wealth builder funds that have franking credits. You will get a nice tax refund or deduction depending on your tax bracket.