Franking credits - gone?

Another comment from Cuffelink’s this time on the use of a COMPANY STRUCTURE for personal investment:

“Laine May 31, 2018 at 3:55 PM #
Another option for a couple is to set up a small private company with both partners as directors and transfer all their Australian shares paying franked income to the company.

The company receives the franked dividends and the franking is added to the franking account for the company. At the end of the year the company pays directors fees to the couple and sufficient franked dividends for the franking to cover the individual income tax owed.

The directors fees are a cost to the company that reduces its taxable income, so the tax owed by the company is more than covered by the franking available from the dividends. All the franking, except the amount distributed, remains on the franking account for the company and carried forward to the following year.

The couple has complete control over the amount of income they receive, so they can keep their joint income below the $86k cut off amount for the seniors’ health care card.

Any unused franking credit is retained in the company instead of being lost. This can be used in future years to offset any tax owing on trading profits or capital gains up to the total amount of the directors fees paid.

This would be an advantage over having the excess franking as an individual or a SMSF where it would presumably be lost if not used up in the year of receipt.”

Labor, let's face the facts on fairness, women and franking - Cuffelinks

And a response:

“Jon Kalkman May 31, 2018 at 9:29 PM #
Laine. If you are happy to use your franking credits to pay your tax liability you are doing exactly as Mr Shorten wants you to do. If that is your wish, you can just as easily hold these fully Australian shares paying fully franked dividends in your own name. An individual can earn $96,250 from fully franked dividends and pay no more tax (assuming no other taxable income) because the tax credits almost completely wipe out the tax liability. Those dividends generate $41,250 in franking credits (in the ratio 70:30). and so the taxable income is $137,500 (dividends plus franking credits) and the tax payable on that income is $41,257 (including 2% Medicare levy). Net tax is $7.

Of course if these same shares are held inside ANY super pension fund (not just a SMSF), the fund collects dividends of $96,250 and is presently entitled to a cash refund of $41,250 from the ATO, because the fund’s marginal tax rate is 0%.

It does highlight the inequity of the Labor proposal. If the taxpayer has a marginal tax rate higher than 0% s/he can use this tax credit to pay their tax liability. It is money they do not have to find – it is good as cash. Industry super funds have also marginal tax rates above 0% because the fund is a single taxpayer paying tax on behalf of all their members, many of whom are in accumulation mode, so these funds too can use these credits to pay their tax liability.

Because a SMSF in pension phase has a 0% tax rate and has no other taxable income to absorb these credits, it will be denied a cash refund under this proposal. In fact, the SMSF will pay a tax rate of 30% on that income, but only if it involves fully franked dividends. Explain how that is logical or fair.”

 

Yep good article here for you to read - S&P 500 companies expected to buy back $800 billion of their own shares this year

 

I dont agree with that view. Its misleading and misrepresents the facts.

The SMSF with 100% pension assets would pay no income tax at all on the dividend. Hence it pays no tax. If the franking credit was grossed up and then taxed and then the franking credit denied that could be the case but it never will.

The sole loss to the SMSF is loss of refundable franking credits. That is not a extra tax cost. It is a forgone tax benefit. If the matters becomes law there could be strategies available to minimise the impact in some cases.

 

Tax credits plan misses bigger picture | Dixon Advisory

 

The trouble with this is that when the shares are sold the company tax rate will apply - 30% possibly.

A more flexible approach would be to use a discretionary trust with a bucket company as a beneficiary. This way when the shares are sold an individual could receive the income and receive the 50% CGT discount. Any dividends could be paid into the bucket company and stored for future use with franking credits.

Legal Tip 151: Structuring the Ownership of Shares Legal Tip 151: Structuring the Ownership of Shares

Also why pay a director fee which doesn't come with franking credits.

 

And good old Bill S also wants to half the CGT discount and tax income from Trusts ensuring beneficiaries pay at least 30% tax rate from memory.

Of course it may not happen and if it did it may not be as currently Proposed.

Interesting times ahead.

 

Compared to investing shares in an individual's name, what is an estimate of the theoretical break even amount where transferring ownership of shares into the dicretionary trust and investment company with the associated set up and operating costs is a more viable option?

 

If you already have a discretionary family trust in place would it be better to create a company or to add parents who are pensioners as beneficiaries? This way the income from divs could go the the pensioner and then he franking credits would still be applicable. Is this correct?


Would the best policy not be to just introduce tax thresholds to retirees over the pension age. This way people with low incomes who receive a franking credit still receive their franking credit and retiresss who derive high incomes from their portfolios either pay tax or receive no credits. Oh wait politicians are usually the ones with high incomes during retirement. Just because you’re over 65 doesn’t mean your income should be tax free if you earn a high income from shares. Or am i getting it wrong?

And while I’m at it. A home is a human right, so wouldn’t it be better for society if home owners actually received tax breaks for owning a home? That would make housing more affordable if the owner could offset the interest against their income. I’ve invested in property for year, but I feel the negative gearing benefits for investors are a detriment to society. Yes shares make a good long term investment vehicle, but property . The first priority of property is to ensure it is affordable. But I guess once again to many politicians invest in property and to many developers have their fat fingers in politicians pockets. And besides if people really want to invest in property their are plenty of REIT’S to choose from

 

What about the loss of the pension?

I have found many would rather get a $21k pension than invest and make $22k or more.

 

Yes true

 

The government has taken note of you policy suggestion and immediately implemented a higher tax free threshold for seniors by introducing the Seniors & Pensioners Tax Offset (SAPTO) to around $32k per year.

 

Ahhh so pollies do sit on forums and steal all their best ideas

 

What is Labor’s franking impact outside of super and pensions? - Cuffelinks

 

Well, the Coalition just blew any chance of getting re elected. Say goodbye to franking credits. But at least they get a nice increase in their take home pay.

 

?

 

Labour opposes and wants to take away following benefits

1) Franking credit refunds
2) Negative gearing on old properties
3) Tax cuts for high income earners and maybe middle income earners
4) Infact they want to increase top marginal tax rate
5) Opposes company tax cuts
6) Taxing discretionary trusts income at minimum 30%
7) Reducing CGT discount by half

I might have forgotten couple of other changes. But let's step back and think which part of the economy does the above policy impact one way or the other. It's the productive part of the economy.

Chances are the population that is part of the productive part of the economy will see through these polices and vote accordingly. Thank goodness the productive part of the economy is larger than the non-productive part of economy.

The non-productive (excluding retirees whose SMSF might be impacted by franking credit changes) would no doubt vote Labour.

I still believe if ALP continues with their current policies and LNP don't do anyting stupid they have a good chance of getting re-elected.

Cheers,
Oracle.

 

I totally agree with the above. Wasn’t saying Labour should get in. Just saying that the Coalition have potentially lost a lot of support with their new income tax policy. With a lot of middle income earners not really seeing much benefit and high income earners receding the majority of the benefits. I don’t agree with this policy personally but yes the LNP’s policy proposals are atrocious and the general public will possibly see through these. Maybe?

 

Hmm I am normally a labor voter but even I can see that Bill Shorten simply wants to tax the **** out of me so he can open the spending taps and shower cash on... everyone else. Remember how Gonski and the NDIS were/are blowing a hole in the budget? Anyone seriously think Labor will actually use all this tax to pay down debt? No didn't think so.

I will be holding my nose trying not to gag while I likely put a 1 against the muppet Liberal candidate who represents my electorate.

 

I cant see how Labor can win the next election. If negative gearing removal was so good policy Labor would have won last time. The reason the Lib lost their govt in 2007 because of Workchoices and some people sick of old John. If he passed his PM to Peter, maybe it could be different.
MT was a barrister and banker. He already got the momentum from the last 3 years. He put in some $ and won the election last time. This time he put in a few more $ and cant lose unless some extraordinary scandals happened. My 2c