Margin Strategies

Hey @Hodor, I don't get that. If I've understood (questionable ), the company I have shares in has already paid tax on their $X at 30% if fully franked. If I'm in the 45c bracket, I need to make up the shortfall of 45-30=15% on the $X. On the other hand, if I'm in the 19c bracket, ATO sends me 19-30=-11% (=11% they owe me) on the $X.

If that's right, isn't franking of much more benefit to lower tax brackets (e.g. 15% super in accumulation or 0% super in pension mode, or company/trust at 30%) than higher tax brackets?

I get that a dollar pre-paid is still a dollar, but my tax bracket determines whether I still owe more, or get owed. I know which I'd prefer .

 

Thanks to everyone for the assistance. I'm now looking at non-deductible debt recycling as part of the mix...

 

I am not good with figures. So maybe this is already covered.
I can see that the 100% loan has interest per year of $6k.
But - if you are not paying $6k per year and have $100k investment without a loan - and you add that $6k that you are saving (from not having to pay interest) each year. How does that compare to the 100% loan figure? I hope I am explaining that right.

 

In the scenario run, the assumption would be that the 4k dividends would be covering the majority of the 6k interest.
If it's 100% cash, (i.e. no interest) with franking, the end result was $3742 cash (assume no sell) post tax, or $8742 minus selling fees if you sold. I guess you could add another couple grand opportunity cost to that as that was the 'negative' aspect of the 100% geared investment.

Or another way to look at it.
For a total $100k upfront, you end up with $8742 cash post tax (incl. capital gains) @ EOY.
For a total of $2k throughout the year, you end up with $4812.16 post tax (incl. capital gains) @ EOY.

edit: Obviously gearing is a double edged sword, etc. etc.

 

I know which tax bracket I'd rather be tax at too, nothing to do with the value of franking credits.

I'm away, I'll write a proper explanation when I'm back.

 

Annoyed, I answered this (more clearly) had to go and my reply didn't save, anyway.

The point is don't confuse/mix value of franking credits with benefits of different tax brackets/environments.

0% tax

$100 franked, gets tax refund of $42.86 - has $142.86 in the bank

$100 unfranked keeps $100 with no tax to pay

45% tax

$100 franked
$142.86 gross up, owes $64.29 tax with $42.86 credit from franking, pays an additional $21.43 and is left with $78.57

$100 unfranked
pays $45 tax and is left for $55

For the 45% tax payer to get $78.57 after tax with unfranked dividends they need an additional $42.86 in dividends - the same amount as the franking credits and difference between cash in the 0% tax bracket.

Hopefully this illustrates the power of franking and the performance drag of tax! 260% more cash with fully franked dividends credited at zero tax vs no franking at 45%.

How well all these things are priced in is another question all together.

 

I don't understand the whole argument about yield with franked vs non-franked.. it's pointless. You can't compare 4% franked vs 4% non-franked.
4.00% FF = 5.71% unfranked i.e. 4% / (100-30%)

It's that simple.

The benefit of franking credits only really comes to light if you're using a holding company. While you pay tax on the income to your company, you get it back when you start distributing dividends from that holding company.

 

Exactly, it is best to gross everything up IMO so you have a basket of apples.

Not sure about that

 

Thanks @Hodor! That's useful.

What I take away is:
- it's "better" to get franked dividends vs unfranked (in any particular tax bracket)
- low tax brackets increase the enjoyment of your increased wealth vs higher tax brackets (ie. you get more - doh!)

I feel a bit obtuse though, since I think this goes against your previous "It is important to remember that franking has no more or less value to any tax bracket"...

 

A dollar of franking credits equals a dollar of earnings for all tax brackets, what you keep differs due to tax.
You can argue this point on differing dollar values and how you define them, in this case a dollar might not be a dollar - depending on your tax bracket, this extends across the board to all earnings (not limited to franking credits). Are you also going to define a dollar of earnings weighted by tax bracket? Are you going to also apply weightings for when the dollar is earned during the year? Inflation?

Pre tax, post tax, before fees, after fees, when earnings occur etc are just the beginning of slippery slopes where reported earnings and out performance actually represent under-performance for those invested.

IMO this to be dangerous as you get skewed results that are difficult to understand, mistakes and inconsistencies are more difficult to identify.

 

Now I understand where you're coming from - thanks for keeping going @Hodor !

 

Hey I might be a lil late to this party....

Is there a reason why are you not calculating capital growth on loan amount and dividend on loan amount??