DRP - BSP Franking & Discount Rate

[Klimer]

I'm thinking of participating in my shares' re-investment plan.

I read that DRP provides me with franking credits, while BSP does not. However, if the declared dividend was franked, does that mean I will receive more shares under BSP (i.e. with franking eliminated)? Or will I receive the same number of shares and the franking simply going to "waste"?

Also, I understand the issue price is a weighted-average calculation. Hence, I was wondering at what discount rate does re-investment plans become "worth it"? Thanks!

 

[Klimer]

Could anyone help me out here, at least with the first question?

If a company issues franked dividends, will I get more shares under BSP than DRP? Since DRP has attached franking credits while BSP does not. Or will the franking credits simply get forfeited under BSP? Thanks!

 

[SuperGlue]

Basic difference link: http://www.mysharetrading.com/what-difference-between-drp-and-bsp.htm

Refer to ATO for latest taxation update

 

[drsmith]

If a company issues franked dividends, will I get more shares under BSP than DRP?

In a sense, you've allready answered it.

I read that DRP provides me with franking credits, while BSP does not.

With the DRP, the dividend and franking credits are assessed as cash and you are entitled to offset the franking credits against your overall tax liability. As you have purchased shares with the dividend, it adds to the cost base of your overall investment for CGT purposes.

With the BSP, the dividend is not taxable as income, the franking credits are lost and the cost base for CGT is unchanged. That's at least how it used to work in the 90's.

The ATO will have more information.

http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/51044.htm&page=1&H1

 

[Klimer]

Thanks for your replies. Sorry I'm a new investor so even though I've actually read both links before posting, I'm still confused. Let's me use an analogy for my question:

My share declares a dividend of 10cents, 50% franked.

- If I join DRP, I'll get 5cents in shares and 5cents in franking credits.
- If I join BSP, do I get 10cents in shares (since no franking)? Or only 5cents in shares, with the remaining 5cents (50% franking) forfeited?

 

[drsmith]

My share declares a dividend of 10cents, 50% franked.

- If I join DRP, I'll get 5cents in shares and 5cents in franking credits.
- If I join BSP, do I get 10cents in shares (since no franking)? Or only 5cents in shares, with the remaining 5cents (50% franking) forfeited?

OK!

You've been enrolled for dividend imputation 1.01.

Your task is to read and understand the following information from the ASX's website.

http://www.asx.com.au/resources/investor-update-newsletter/201207-fabulous-franking.htm

Upon conclusion, your examination will to be to calculate the imputation credit for a dividend of 10 cents per share, 50% franked and to determine the after tax income per share based on a marginal income tax rate of 37 cents in the dollar.

 

[Klimer]

Thanks for the reply. To your test, the tax income would be 2.6cents per share?

However that still doesn't answer my question. I'm not asking about the value of either the dividend or shares I'll receive at all!

When I read about Bonus Shares Plan (BSP), it says that I won't receive the benefits of franking credits. If I select Dividend Reinvestment (DRP) instead, I will still receive the franking credits. I know there's different future tax implications between the 2.

But right now, if a company has already paid tax and declared franked dividends, would picking BSP give me more shares than DRP or will the franking credits simply be lost??

I concede that I may not have fully grasp the concept of franking, but I am a newbie and is there really need to confuse me further when a yes/no answer would help greatly?

 

[burglar]

... is there really need to confuse me further when a yes/no answer would help greatly?

You are permitted to ring the man at the ATO.
Generally, he is more helpful than members of a forum.

 

[Julia]

You are permitted to ring the man at the ATO.
Generally, he is more helpful than members of a forum.

Seems so obvious, doesn't it, burglar.

 

[drsmith]

I concede that I may not have fully grasp the concept of franking, but I am a newbie and is there really need to confuse me further when a yes/no answer would help greatly?

Your comments on franking though indicate though you do not understand how it works. It's an important concept though when making investment decisions that concern it.

A saying comes to mind that I recently read on this forum. Give a man a fish and you feed him for a day. Teach him how to fish and you feed him for a lifetime. It's up to you as to the depth of understanding you wish to have in the choices you make.

Investment decisions often require a greater depth of understanding than what a simple yes/no offers.