With Washington H. Soul Pattinson & Co. Ltd (ASX: SOL) and ARB Corporation Ltd (ASX: ARB) shares you could beat the taxman.
How you can beat Mr Taxman with ASX shares
One of the best ways to beat the taxman (aka the ATO) is to buy shares which pay franking credits with their dividends and hold them for the long term.
It's not much of a hidden secret, seeing many of Australia's richest people use a similar strategy. But it is very effective.
You can think of franking credits as tax credits. Basically, if you're an Australian resident for tax purposes and hold your shares for more than 45 days (not including the days which you buy and sell), you can use your 'tax credits' to offset your income tax (e.g. tax paid on your wage). If you receive less than $5,000 worth of franking credits, the 45-day rule does not apply.
It's super-effective for people who pay tax at the highest marginal tax rate (45%) and self-managed super funds (SMSFs).
Another way to beat the taxman — a little bit — is by investing for the long-term. If you hold an investment in shares for more than 12 months and you sell your shares for more than you paid for them you will incur a 'capital gain'. Basically, if you held the shares for more than 12 months you pay income tax on only half of the capital gain. Meaning, you can collect half of the capital gain tax-free!
Of course, it's always a good idea to speak to your accountant.
2 ASX shares to beat the taxman
Here are two popular ASX companies that offer tax-effective franking credits:
- Washington H. Soul Pattinson (WHSP). WHSP is a company that invests and holds shares in other companies. It is a long-term investor, so it collects dividends — and franking credits — from the companies it owns. It then aims to pay a rising stream of dividends to its shareholders. It is forecast to pay a 3% fully franked dividend.
- ARB Corp. ARB is the bull bar and 4×4 accessories business. You have likely seen the small red logos on 4x4s, SUVs, utes and trucks. The company is Australia's leading bull bar maker, with an eye for strength and safety. Given its success locally it is now taking its products abroad to Europe, the USA and the Middle East. It is forecast to pay a 2.1% fully franked dividend.
Foolish Takeaway
Picking the best ASX shares paying franking credits and making your investments tax-effective by focusing on capital gains is a great way to grow your wealth over time.
