Franking credits: Your marginal tax rate

I'm still trying to get my head around franking credits as it relates to an individual shareholder's marginal tax rate. For example, let's say there are two investors who each receive 1 million dollars in fully franked dividends.

Investor 1 has $0 other income for the year, so he's obviously on a marginal tax rate of 0%.

Investor 2 has $18,000 in salary income which still puts him below the tax free threshold. So his marginal rate is also 0%.

Am I correct in assuming that both investors will be able to claim the franking credits to the full extent? It just seems somewhat counter-intuitive to me that investor 2 can claim the franking credits to the same extent as investor 1 even though he has used up almost all of his tax free threshold and is actually very close to the next higher tax bracket.

Also, when considering a shareholder's marginal tax rate, is it a static figure or does it move to higher brackets when you receive more dividends. In this example, wouldn't 1 million dollars worth of dividends move them to the highest marginal tax rate? Or does someone stay at the same initial marginal rate irregardless of how much dividend they receive?

 

It moves to higher tax brackets as you receive more dividends. A more correct way to think of it is:

The franking credit is added as income AND applied as credit against the tax owed.

Say you receive $70k of fully franked dividends. You are receiving a franking credit of $30k.

Assuming no other income, your taxable income is $100k (the dividend + franking credit). Work out how much tax you'd pay on $100k - according to the ATO Simple Tax calculator it is $24,497.00.

However - the franking is applied as a credit against the tax owed - so instead of you paying the $24,497 you will get a refund of $5,503 at tax time.

Regards,

Jason

 

Don't bother about marginal tax rates. Add the grossed up dividends to the other taxable income for the year and work out the tax applicable. www.taxcalc.com.au is a good calc.
Then apply a credit for the franking credits. or deduct franking credits from the total tax payable and that will give you the top up tax.

 

Franking credits are tax credits.

When you get paid a dividend from a company, the business income becomes personal income attributed to you. As @Terry_w says, the grossed up business income is added to your personal income for the year. Like any other tax credit (ie when an employer withholds more tax than they should), the ATO balances the books. If the tax withheld is more than you owe, you get a refund. If it's less, then you pay up.

For anyone earning over $180k before dividends, that means that you'd owe an extra 17c (47c - 30c) for every $1 of gross dividends paid. They don't mention that when they talk about franking credits on the news...

 

So after everything is sorted and taxes paid/refunded, I should end up with $75,503 in my pocket?

 

Yes (assuming no other income).

 

Thank you all very much for the clarification, I think I finally get it now!

 

For a person who earns say $180,000 tax final tax is $57,697
For every $10K of cash franked divs (ignoring the franking) the tax shortfall is 24.2824%

This occurs up to approx $31K of divs and then it gets worse. This takes income for Div293 purposes to $250K. meaning a further 15% tax applies to approx $17K of employer contributions. This adds approx $2550 further tax which takes the "marginal shortfall" to approx 25.3% plus. And this assumes the taxpayer has private health. Miss that and the shortfall is around 27.3%
So on $100K of FF divs as the only income the shortfall should be $355. So "tax paid" break even for a self funded retiree is approx $101K

But a non-resident investor just loses their franking credit and pays $0. Make sense ? Hmmm not to me.

Oh...and probably wont pay CGT when they sell

 

or you could just whack your holdings onto the bonus share plan and sit on your eggs?

Caution troops! Over the next hill lies the LIC zealots.....

 

The eternal tax angst.

Echer got it down pat.