Franking credits - gone?

Discussion in 'Sharemarket News & Market Analysis' started by Alex McDonald, 13th Mar, 2018.

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  1. kierank

    kierank Well-Known Member

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    We are in the same boat but for different reasons.

    As we are in retirement and wanting to reduce our risk exposure, we are re-structuring our property portfolio so that it moves from being negatively geared to positively geared. So the ALP NG policy won’t affect us.

    Once we claw back our tax losses, we would be paying tax on the income. If the ALP gets in, we might have to buy some FF shares. Sounds like there might be some cheap ones around :D.

    Thanks Bill Shorten.
     
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  2. @FruitCake@

    @FruitCake@ Well-Known Member

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    A retiree who earnt a modest income works for 30 years ends up with 925k in Super, let’s assume it was entirely in Aus shares and the whole portfolio yielded fully franked dividends at 4% which translates to $37,000. Under Shorten, this individual would effectively be taxed at the company tax rate at 30%. If the person earnt $37,000 in the form of rental income instead or working a part time job they would be paying 20%. So is Shorten telling this person, don’t invest in shares but get an investment property or a job instead because we are no longer paying out a tax refund for imputation credits? Am I missing something here?
     
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  3. wategos

    wategos Well-Known Member

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    Yes you are missing something huge.... yes the minimum Tax on franked dividends is 30% but the company is still paying ALL of this, the shareholder still gets the dividend tax free as they do now. Difference is if their marginal rate is lower a refund won't be paid.
     
  4. @FruitCake@

    @FruitCake@ Well-Known Member

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    So is tax not taken out of the dividend that is paid out to the shareholder? My understanding is that the dividend paid out is after the company has paid their 30% of which this 30% is then added on as a credit to the dividend that can be claimed against the individual’s actual tax bracket.

    The key is in what you said, if their marginal is lower, they get no benefit from the imputation credit at all, it is only those with a higher tax rate than the marginal that will benefit. Hence going back to the argument that this hurts those with smaller balances more.

    I think the introduction of pension incomes being made tax free back in 2006 which I believe came after Howard brought in the refund of imputation credits for those below the marginal tax rate needs to be looked at first.
     
    Last edited: 14th Mar, 2018
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    Maybe retirees will need to invest heavily in shares so their income outstrips the tax arising from dividends... ..Oh that's right, they can't - they've retired and are living on savings/super/allocated pension etc.
     
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  6. wategos

    wategos Well-Known Member

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    For low income earners the dividends would be completely tax free. For higher income earners the dividends taxed extra (marginal rate - company rate), simple as that. Yes lower income earners would lose out since (company rate - marginal rate) not refunded. But this is an extremely generous system (which I would like to keep personally) but not really affordable longer term, not surprising it will be wound back eventually.
     
  7. @FruitCake@

    @FruitCake@ Well-Known Member

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    And hence the point I’m making with regards to Shorten making the sell as if he’s targeting the wealthy very very misleading.

    That dividend income is not tax free. Being a part owner of the company, they have paid 30% in tax. The dividend coming in is AFTER the company has paid the tax of a rate of 30%.

    If they had earned that income differently i.e not through a company, it would be taxed at 20%
     
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  8. jprops

    jprops Well-Known Member

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    Interesting point by Ross Greenwood

    "A giant allocated annuity fund with billions of dollars in it – effectively a super fund in pension phase – is one tax payer. One taxpayer out of the million taxpayers affected by Bill Shorten’s changes.

    But that allocated annuity fund might have thousands of people invested in it - people who are lower and middle income earners, who rely on that fund for their retirement income. And Shorten’s move has the potential to reduce their returns."

    Shorten's tax plan straight out of the Keating playbook

    So maybe that tax payer that received a 2.5 m return was an allocated annuity fund?
     
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  9. PandS

    PandS Well-Known Member

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    Nooooo :) I been getting a refund on my SMSF because of excess franking credits
     
  10. PandS

    PandS Well-Known Member

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    If you get all your income from fully frank dividend you get a nice fat cheque of money at tax time,
    the hidden secret of many wealthy SMSF funds :)

    Super pays 15% tax, Company tax at 30%, you get 15% back
    I have been getting a refund because I get a lot of franking credits in my SMSF
     
  11. PandS

    PandS Well-Known Member

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    No, the real power is in SMSF as I explain in the previous post
    that why you don't see many rich people holding residential properties
    it either commercial for their business or FF dividend shares
     
    Last edited: 14th Mar, 2018
  12. PandS

    PandS Well-Known Member

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    No it all about the franking credit if your SMSF earns $37,000 at fully franked
    you don't pay any extra tax because Tax already been paid for you by the company at 30%

    Labor proposal
    you don't get the refund difference between with tax free (30 - 0 = 30% refund) or 15% super tax (30 -15 = 15) which is an awesome bonus
     
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  13. Lizzie

    Lizzie Well-Known Member

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    I know - I was getting really annoyed at a "Labor" economist on the radio yesterday, talking about how it would affect people with $10mil in their super - who the **** has $10mil in their super?

    When the interviewer pushed him towards examples for the small investors who might get back $500-$2,000, he then said they may have to miss out on a holiday for cut back on Christmas presents - WTF - maybe, just maybe that $500 pays for their electricity bill or food on the table or homebrand kibble for their rescue dog ... sheesh ... talk about not living in reality.

    As others have said, doesn't really affect me as most of our super is held in property with only minimal in shares - but I am one for a fair go
     
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  14. Scott No Mates

    Scott No Mates Well-Known Member

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    Definitely needs a reality check - Xmas presents & holidays are sooooo overrated. :rolleyes:
     
  15. Francesco

    Francesco Well-Known Member

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    Vote Labor 2019:
    Negative gearing to go for aspiring landlord!
    Imputation credit to go for all non tax paying retirees!
    :D Go Ozzie!
     
  16. PandS

    PandS Well-Known Member

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    The other magic is excess company franking credit, foreign investors cant use franking credits
    so company build up this credit over the years when they have a whopping big number like in millions and hundreds of millions, they start looking at a capital return and use up the franking credits so you end up getting a special payment with 30% FF

    It is a generous system but getting rid of it I wouldn't vote for it, maybe put some limit on the wealthy so the lower end can get some perks
     
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  17. mc123

    mc123 Well-Known Member

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    I've been investing in a parents name the last 2 years as i'm on a much higher MTR with franking credit refunds as part of the strategy... maybe it's time to sell and move it back to my name..
     
  18. Zenith Chaos

    Zenith Chaos Well-Known Member

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    The simple mathematics:

    Current aged pension for couples is 622 / per person / fortnight ~ 16k. To get that in dividends assuming 5% yield ~ 320k.

    85k income is the approximate cutoff where it makes no difference. This equates to 1.7 million invested.

    Therefore this will effect anyone with between 320k and 1.7m. I don't have the figures but I'm almost certain that it is an exponentially decreasing distribution from 320 to 1700 - IE most of the people are at the lower end of the spectrum.

    So who is its going to effect? Everyone who is NOT on a full pension or has less than 1.7 million. I believe that is most people. Note I am assuming that everyone has some franking credits in their portfolio, if not you'd be either 100% international, bonds, cash or property.

    Wealthy retirees hardest hit by Labor's dividend tax plan

    This policy penalises most people who have worked hard so they can have a dignified retirement, it won't penalise the "wealthy".

    Please let me know if I have made any glaring mistakes or oversights.
     
    Last edited: 14th Mar, 2018
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  19. jprops

    jprops Well-Known Member

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    Yes I've been thinking about this. But there's one point that gets me stuck. A company typically only pays out 70% of profit, the other 30% retained.
    It would seem by this logic though, all the companies profits would need to be taxed at the individual shareholders tax rate, not just the portion that was distributed as dividends. What do you think?
     
  20. Scott No Mates

    Scott No Mates Well-Known Member

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    Just had a quick look at the tax scales: an MRT of 30% doesn't kick in until you hit $180,000 income ($54,232+45% over $180k) excluding mediscare levy.

    Based on my limited understanding of these things, anyone earning less than $180k dividends with no other income, will be worse off as they will lose the excess franking credits.
     
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