Company tax rate cut to 25% - effect on fully franked payments

Bugger.....

The company tax rate has been cut to 25% for businesses with a turnover up to $50 million a year (at first)
Nick Xenophon defends deal to pass Government's company tax cuts

It seems that most/all LICs, EFTs etc will be over the $50 million annual turnover?

Comments?

 

ETFs pass through franking credits, they don't actually generate them as they don't pay tax. So it will depend on underlying assets as to franking levels.

I haven't read the announcement or thought about the effect on LICs so I won't comment.

 

It's a big win for those running a bucket company set up or have a company in accumulation.

For those that distribute there full or most of their after tax profits it makes no difference. As their income tax rates haven't changed.

 

At best you were getting 30% tax prepaid on your dividends. Now you'll get 25%, so you'll be up for an extra bit in tax.

 

Yes but the LIC makes more money after tax so can distribute more.

Can't see much of a change for investors in LIC. Am I missing something

 

According to what I've read, the first 4 years the rate is 27.5% - not 25%. Also the reduced rate only applied to companies with turnover of less than $50m. I would have thought most LIC's - or the subsequent companies they invest in would be above this limit and hence not affected.

Did a quick scan and ISD (smallest constituent of XJO) had revenue of $156m last year.

Where there will be a real benefit is if you are holding your shares/LIC's in a trust with corporate beneficiary. Less tax on distributions to the corporate beneficiary means more retained capital for future investments!

Regards,

Jason

 

Yep, this is what I found and thought I would post this thread for some discussion around the concept. Not sure if/when larger companies will have their tax reduced (if this is the thin edge of the wedge, or if it's a way to boost smaller companies' positions).

Great approach.

 

My first thoughts exactly upon hearing the announcement.
Am I calculating this correctly.
At a 30% company tax rate a 4.5% net div yield grossed up is a 6.42% return
Now at a 25% company tax rate that same 4.5% net div yield is at 6% gross?
Again I know this applies to company's under $50m.
Regardless the tax laws, economic conditions or whatever it may be at the time, a successful investor in my view will always find a way to turn a negative into a positive or at the very least make changes /adapt to conditions at the time, be it ownership structure, asset class etc.
Not necessarily saying this latest change is a negative.

 

One small issue... your ignoring that if a company is paying less tax they will probably pay larger dividend and if not their NTA will increase and so should their share price.

 

Yes that was my train of thought exactly! Interesting times ahead
Thanks for the reply!

 

If a company is paying $1 dividend with 30% franking credit you add $1.42 to your income and get a 42 cent tax credit.

Now if you get $1 + 25% credit you will add $1.33 for a credit of 33 cents or if everything else was equal, a $1.42 gross dividend would include 35 cents tax paid vs the previous 42 cents.

It doesn't affect the business.

 

If a small to medium company has paid 30% tax on profits this financial year, then next year it distributes those profits when the tax rate is 25%, does that mean the franking credit will be at 25% or 30%?

 

Frank credits are credits for tax paid by the company so it should be 30%.