Tax Tip 114: Franked Dividends and Tax

Interesting.
Thanks
Marg

 

Thanks @Terry_w.... timely tip....

I am trying to get my head around how franking credit is considered for negative gearing calculation.....few examples I am looking at basically turns negatively geared investment in positive if you include franking credits...

Example....

Person borrows 100K @ 5% to invest in ANZ shares. So this 5K will be deductible....let's ANZ dividend is 4% and 2% franking credits (fully franked). Person's other income is 51K.

So at tax time, person receives 4K in dividend and 2K franking credits. Also its claiming 5K against its other income....So end picture for this person is
(51K current income + 4K income -5K deductible) = 50K assume tax @ 30% so total tax liability is 15K out of which 2K franking credits offset hence final bill is
13K....

However, if we look at just the investment portion for person i.e. 4K income + 2k franking credits - 5K deduction = 1K income....in ATO eyes is it positively geared??? if we remove the 2K franking credit from this calculation then we have -1K (negatively geared)...

trying to understand how does tax office look at this investment arrangement....is it geared +/-???

 

The example $2k franking credits are assessable...

So ignoring all the quirks of reality (medicare levy etc etc) taxable income is 51 + 4 + 2 - 5 = 52

Tax is is 52 x 30% = 15.6

Less 2k franking offset

= 13,600 tax payable

 

You are assessed as if you received $51+4+2-5 then any tax that you've paid is deducted and the franking credits are added to the tax already paid.

You then get a cheque or a bill against the amount of tax assessed against your income.

 

Yes, what I thought, thanks.
Sounds like I would be better off moving to shares with higher yields and no franking if possible, but the highest yields are fully franked anyway... (you would think unfranked dividends could be higher... but no). The franking credits are useless since they just move the tax payable from Australia to another country (Spain).

 

ATO is interested in taxable income. It doesn’t matter whether separate investments are positively or negatively geared.

 

Thanks @marty998 for clarifying the calculation....

just to keep investment in mind....4+2-5....so i guess in ATO terms this is positively geared??

 

I am not sure of the answer to this.

 

Thanks Terry....so if labor party comes in power....5K as per the example is not deductible i guess as they will be removing negative gearing....correct??

 

Yep, If company does not change payout ratio, say 65% for example then the dividend per share will increase but franking credit per share will decrease in reduced company tax scenario.

Net result, it's a wash.

 

I have no idea on these proposed changes.

 

Err... I would have thought investment expenses are deductible only to the extent there is investment income...

So $5k is still deductible for you in that example..

but yeah, Labor policy didn't have the full details...

 

it would be interesting once they release the details....my understanding is anything except new properties can't b negatively geared if they come to power....

 

Hi @Terry_w If you reinvest all dividends back into the shares how does the frank dividends work... Can you still claim them?

Cheers

 

I reinvest dividends and claim franking credits. The two are quite separate. On the statement the total amount of the dividend is stated, then how many shares purchased and for how much.
Marg

 

Reinvesting is the same as recieving money and buying shares again - without the brokerage

 

Using a margin loan one can greatly increase their dividend income but margin loans can be risky especially when highly geared.

There used to be a practice of "dividend washing" where by an investot could claim the franking credit twice on a parcel of shares. But the party pooper ATO cracked down on this practice several years ago.

So there was a time when high yield shares plus margin lending plus dividend washing made an investor a heck of a lot of money.

 

I think you can still do it (twice) as long as the franked credits are below 5000 per year. Other than that 45 day holding rule applies.
Any information sources on portfolio management, entry exit rules and stop losses just for dividend washing.

 

Denied franking credits applies to any scheme to farm franking credits. The double dip scheme for farmed credits was subject to a taxpayer alert. It could end in criminal charges.

 

Yes subject to the deed allowing streaming of trust income. However its not that easy. Some beneficiaries arent taxed. The trustee is.

Peanut Shorten announced a concern long ago about retirees and investors who get franking credit refunds. He wanted to end the practice of franking at one point and revert to the pre-Keating days.