Concequences of removing credit of excess franfind credits

Discussion in 'Accounting & Tax' started by Handyandy, 26th Mar, 2019.

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  1. Handyandy

    Handyandy Well-Known Member

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    Some thing that just came trhough the emails.

    There has been no discussion about the impact of not receiving the excess franking credits which in tax returns counts towards gross income and upon which the medicare levy and other social benefits are calculated.

    .
    "Mr Deutsch gave an example of a single retiree named Anna, who has income consisting solely of a franked dividend of $20,000, franked at 30 per cent.


    “Anna must include in her assessable income an amount of $28,571 (i.e. $20,000 + $20,000 x 3/7). As she has no deductions, her taxable income is also $28,571,” Mr Deutsch explained.

    “The gross tax based on 2017/18 marginal rates is $1,970. Under Labor’s plan to deny excess franking credits, the $8,571 is offset against the gross tax of $1,970 such that the net tax payable is reduced to zero, with an excess of $6,601. However, that excess of $6,601 now currently refundable will, under Labor’s plan, be no longer refundable.”

    While that aspect of the proposed policy and its impact is reasonably well understood, what has not been is that, even though the $6,601 will no longer be refunded under the Labor plan, the Medicare levy will continue to be calculated on the full taxable income of $28,571 rather than the lesser amount of $21,970 (being $28,571 minus $6,601), he explained.

    “The Medicare levy would then be 2 per cent of $28,571 or $570 as opposed to a Medicare levy of $0 if based on taxable income of $21,970. That is because the Medicare levy for a single person not receiving the Senior Australian Pensioner Tax Offset (SAPTO) is 2 per cent of total taxable income if taxable income exceeds $27,476, but is NIL if taxable income is less than $21,980,” he said."

    ‘Inappropriate’ Medicare outcome flagged with franking credit denial
     
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  2. Handyandy

    Handyandy Well-Known Member

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    Mods can you please fix heading as seems to have typo
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    This issue has been doing the rounds of practitioners for a while now and has created some concerns. However prior to the changes which made franking credits refundable it wasnt a concern so it may be difficult to mount a high court challenge. Tax laws are often unfair.

    It impacts a few things like Div 293 tax, medicare levy, MLS, HELP debts and so on.

    The issue sounds quite logical and sound when its expressed that way but it must be remembered that it would be reversion of an existing tax law back to the former law. And the impact on low incomes may actually be a higher magnitude than higher income persons. eg at a tax rate of 0% the full loss of a refund is far greater than a taxpayer at the highest marginal tax rate who continues to pay the same uplift tax rate.

    One very simple avoidance strategy may be for taxpayers to vary PAYG Instalments or witholding tax down so that the franking credit is applied to tax due. Arguably, this could be a lawful reason. Where the taxpayer who overpays their instalments nominated by the ATO may get a $0 refund of the franking.

    The key concern is its not about income. Its about the refund of excessive tax already recognised as paid. If the ALP proposed a policy that said they would no longer allow the ATO to send individuals tax refunds of more than $1K its not greatly different.

    The ALP modified their policy in late March 2018 after a outcry and announced that pension or allowance recipients would still access the refund of franking credits. They also said that if at least one member of a SMSF received a pension or allowance (FROM GOVT !!) they would be excluded. Well I reckon thats a snow job since I dont think I have ever seen an aged pension recipient who is a SMSF member.
     
    Last edited: 26th Mar, 2019
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