LIC & LIT Risks of DSSP while on high income

Discussion in 'Shares & Funds' started by DoggaPP, 8th Nov, 2018.

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  1. DoggaPP

    DoggaPP Well-Known Member

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    Your thoughts please.

    What are the likely risks of just concentrating on buying AFI and WHF and using DSSP for the next 5 years whilst I am on high income?
    Assumptions - Holding forever and am following Thornhill concepts
     
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  2. Carpe Dividendum

    Carpe Dividendum Member

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    As long as you hold forever, the DSSP makes good financial sense. The risk is that you might not end up holding forever, and having a large capital gains tax to pay. Best laid plans, and all that...

    I’ve written a lengthier analysis of the DSSP on my blog recently. Not sure if links are allowed, but if you’re interested you’ll find it by searching for my username.
     
  3. DoggaPP

    DoggaPP Well-Known Member

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    Yes, I am a reader of your blog and that was a great post.
     
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  4. FredBear

    FredBear Well-Known Member

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    I just read you blog post and thanks for that, some great information! It got me thinking, would using DSSP be a good approach for an expat who will return to Australia in a few years? Currently expats loose the franking credits, and depending on where you are pay local tax on the dividend income on top of the lost franking credits, so effectively I am paying 45% tax on dividend income now. Electing to use DSSP would mean no local tax or Australian tax now as there is no income, and when returning to Australia the cost base of the shareholdings when selling later is taken to be the value on the day you become an Australian tax resident again, so there is no CGT for the period you are abroad. Is this a valid strategy?
     
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  5. Carpe Dividendum

    Carpe Dividendum Member

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    I’m not sure of the ins & outs for expat tax laws, sorry.

    I’d be concerned about the possibility of becoming an expat a second time in the future. Leaving Aussie tax residency is a capital gain event, so if there’s any chance of you living abroad again then the DSSP could bite you.
     
  6. willair

    willair Well-Known Member Premium Member

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    Quote..
    So what can I learn from that chart? Bugger all. It’s just white noise, especially over such a short period of time. I should stop checking the prices, and just kick back and wait for the dividends to roll in,..

    Interesting outlook,welcome to the site..
     
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  7. Zenith Chaos

    Zenith Chaos Well-Known Member

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    A company pays 27.5% tax. Franking credits are 30%. Structuring may solve your problem. Forever is a long time and DSSP means you lose franking credits.
     
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  8. Scott No Mates

    Scott No Mates Well-Known Member

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    So there's around 10% more franking credits available than the tax paid by the company? That anomaly will need to be shut down pretty quickly. :confused:
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    franking credits can't exceed the tax the company pays.
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A non-resident wouldn't pay CGT on Australian shares though. But there may be local taxes to consider.
     
  11. SatayKing

    SatayKing Well-Known Member

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    How many companies actually effectively pay 30% let alone 27.5%? Isn't it prima facie but I could be wrong of course - and probably am!
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What about the discretionary trust with bucket company strategy. Income and franking credits diverted to bucket company with bucket company lending back to the trust under a compliant loan agreement. shares of bucket company owned by separate discretionary trust. Caps tax rate at 30%, gets the 50% CGT discount and no loss of franking credits.
     
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  13. PandS

    PandS Well-Known Member

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    Lot of our ASX companies has foreigner investors and they are not eligible for franking credit so the company can have more franking credits than the actual tax paid :)
     
  14. dunno

    dunno Well-Known Member

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    That is not how it works. Forgone franking credits by foreign investors does not benefit the company, just the tax office. The franking on a class (ie ordinary share) of dividend must be the same. You can’t issue franked dividends to some shareholders and unfranked dividends to others unless it is another class of share (ie preference shares). Companies can decide the level of franking up to the amount available in their franking credit account but the levels of utilisation of those franking credits by foreigners (or those on domestic marginal rates below 27.5%/30% if franking refunds are eliminated under Labor) has no impact on the company.
     
  15. PandS

    PandS Well-Known Member

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    franking credit is in the ATO system but it is company franking credits, they can unlock and use them as they wish.
    M&A, Spins off, all sort of activities can unlocked franking credits for their holders.

    I am in the receiving end of many of those activities.

    Stuff they can do like paid a 100% full franked special dividend as part of the M&A activities when they have plenty of franking credits
     
    Last edited: 13th Nov, 2018
  16. Mulianto

    Mulianto ~~

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    Hi Fred, have you used DSSP?

    I’m an expat, I’m thinking of using it. While I don’t get taxed for my dividend, then sell without having to pay CGT while I’m still non tax resident before going back to become tax resident again. Am I missing something here?
     
    Last edited: 15th Dec, 2020
  17. FredBear

    FredBear Well-Known Member

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    Actually I haven't used DSSP yet. I sold our former PPOR some months ago and the funds have been sitting in (not so) high interest accounts while we work out our next move: buy another property in Sydney (not likely now until travel becomes possible again), invest in ETFs/LICs in Australia, move funds abroad, or some combination of all these options.

    You don't have to sell before returning, all that happens is that the cost base gets set to the market value on the day you return. So the cost base could be more than you actually paid, or could be less if the value has fallen. If you then keep for 12 months or more you can get the 50% CGT discount.

    Also consider what happens if you need to sell before returning, as there is probably CGT to pay to where you are tax resident. For me the cost base works like this: the original shares retain their cost base, and the bonus shares have a cost base of 0. This is a different approach to that used by Australia for tax residents: the cost base of all shares is the same, the cost base of the original shares being reduced proportionally. For me it would be an option to sell some of the shares and choose which ones: the original shares or the bonus shares.
     
  18. Mulianto

    Mulianto ~~

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    Thanks for your reply.

    I just found out not every company allows DSSP, at least the company I am holding isn’t.

    For me, it works better to sell before I’m going back because my current country has lower tax rate and no CGT hehehe...

    Not sure about yours but take your time to plan. Good luck!
     
  19. Redwing

    Redwing Well-Known Member

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    Hi Terry, noted the below re: tax rates and changes

    Allocating franking credits.
     
  20. SatayKing

    SatayKing Well-Known Member

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    Refer to Page 19 of WHF's (which operates a DSSP) 2020 Annual Report.

    "Treasury Laws Amendment (Enterprise Tax Plan) Act 2017"
     
    Last edited: 16th Dec, 2020

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