Tax Tip 114: Franked Dividends and Tax

How about using equity loan against the home/IP to borrow and invest in high yield plus franking credit shares....

e.g. I am reading Noel whittaker's book and he has listed the example of David Murray (ex CBA) he bought 50000 CBA shares @ 6% making it deductible, (can't remember exact numbers) but example given displays with his holding he end up getting 32K in franking credits + regular dividend each year which reduced his out of pocket holding costs....in fact at the end of each year due to franking credits this arrangement put 12K in his pocket. So he end up enjoying growth in shares value as well as franking credits to increase his cash flow.....can this strategy still work??

So does this mean you cannot earn/declare/offset more than $5000 in franking credits each year....45 day rule I believe is that one need to hold shares for 45 days to utilise franking credits....

 

Based on what I have seen with politicians is what they say, what they do and what gets passed in senate is all completely different story.

Sometimes they make statements all well knowing it's never going to pass through senate but just to get political points.

Cheers,
oracle.

 

Yes, as long as you invest in a share that has higher returns than the interest you're paying.

No you can earn unlimited. They were talking about a specific strategy where you can earn them twice by being tricky, they've capped that at $5K.

 

I think I was reading this somewhere on PC can't find forum but there was good discussion about how buying high yield shares with good franking can work its magic in Super given the low tax environment.....sure you can't claim tax deduction in super (or can you) if you borrow within SMSF..

 

Yes a hi yield strategy can be beneficial in super or any other taxpayer who has a lower income and hence a low marginal tax rate. The franking credits are refundable IF the 45 days rule is met or the franking credits involved are under $5k pa. Doesnt need to be a smsf any super account can. A SMSF can only borrow if it complies with a limited recourse facility and that isnt easy for shares. esp margin facilities - They wont comply. If a smsf incurs loan interest on a legit facility using ASX listed shares then it can claim a deduction. Hardly worth the effort for costs.

A hi yield share in 2015 would be paying less now. Perhaps even part franking or unfranked ? Or its value has fallen. The capital risk must be understood.

 

So overall, in most normal situations, a fully franked dividend is worth 43% more than a normal dividend? Are there many situations where there's actual difference?

 

Someone with no income may get a $700 dividend with $300 franking credits and actually get back $300 at the end of the year.

But someone on $200,000 may have the same dividend getting $700 but actually have to pay another $150 in tax on top.

If the dividend was not franked at all then $700 would be received by the person with no income and there would be no tax back. The person with the $200,000 dividend would pay 47% (plu medicare etc) x $700 or about $300 in tax on that dividend

 

You and your shares 2013-14 | Australian Taxation Office
Extract from above link:

Dividend washing integrity rule

The dividend washing integrity rule prevents you from claiming franking credits where you have received a dividend as a result of dividend washing.


Dividend washing occurs where you, or an entity connected to you, claim two sets of franking credits by:

• selling shares that are held on the Australian Securities Exchange (ASX) and have become ‘ex-dividend’, and then
• purchasing some substantially identical shares using a special ASX trading market.

When the dividend washing integrity rule applies, you are not entitled to claim the franking credits for the second dividend. However, if your interest in the second parcel of shares exceeds the interest in the first parcel, you may be entitled to claim a portion of the franking credits for the additional shares. See ato.gov.au/dividendwashing for more information.


The dividend washing integrity rule does not apply if you:

• are an individual, and
• received no more than $5,000 in franking credits during 2013–14.

However, the dividend washing integrity rule applies where dividends flow indirectly to you through your interest in a trust or partnership.

 

So I guess what I'm asking is whether a $700 franked dividend has the same net after-tax result as a $1000 non franked dividend - no matter what your taxable income is.

 

Hmm. I think so.

$700 fully franked would end up with $1000 in pocket for the person without income.

$530 in pocket of that rich guy.

$1000 unfranked would not be taxed so $1000 in pocket of poor person and

47% taxed in hands of the top income tax payer. So $530 in pocket.

 

Yeah I always thought this was the case when I looked at franked vs unfranked.

So I never understood people's attraction to franked dividends to the exclusion of others when essentially it is the equivalent to a 43% bigger unfranked dividend from somewhere else.

 

so riddle me this one, Only using numbers as an example.
If I had $1mio of ANZ shares in super and they paid a FF dive at 30%, given that inside Super the rate is 15% does this mean that I would have an additional 15% to play with and use to pay the additional admin in a SMSF?
I realise the numbers may be a little skewed but what am I missing in a simplistic sense?

 

I don't know about the percentages but the superfund would definitely be getting benefits from the franking credits, and even more benefits once the taxable rate becomes 0% when in pension mode. $700 dividends with $300 refunded from the credits (the example above with $700 dividends with $300 in franking credits).

 

Good thread. Can someone please confirm whether my understanding of how franking credits work in the case of borrowed money

For the purpose of this example, let us use the following assumptions-
Annual Gross Income(from other sources):90,000
Share Yield: 10% or 7%(FF)
Amount Invested: 100,000

Scenario 1: Using own funds(ie savings)
100,000 returns 7000(FF) ie 10,000 additional income
Tax on share returns(at 39%)= 3,900
Tax owed=3900-3000=900
After Tax Position= 7000-900=6100 or 6.1% ROI after tax

Scenario 2: Using borrowed funds
Again 100,000 returns 7000(FF) ie 10,000 additional income
Interest on borrowing= 4000(say IR@4%)
Profit= 10,000-4000=6000
Tax on profit(at 39%)= 2340
Tax credit=3000-2340=660
After Tax Position= 7000-4000+660=3660 or 3.66% ROI after tax

Scenario 2 is what I really want confirmation on. Thanks.

 

Thanks Paul. Is there any source of detailed information regarding farming franking credits ?

Double dip information is available on ATO and has a bit of leeway if the credits are limited to 5000 per year. Is double franking credit the only pathway to the denied franking or there are other avenues as well wherein the ATO denies the franking credit.

E.g. Assume two different scenarios wherein the foreign entity has arrangements with a resident:

• A resident leases the shares from the non resident entity under an approved lease agreement. Who will receive the franking credits in this situation ? The franking credits will not be double dipping because it will be subject to the 45 day holding period.
• The non-resident becomes a beneficiary along with a resident in a trust and the deed permits streaming. The resident receives the credits and the non-resident the dividend. Possible or not ?

 

Part IVA = your post

 

Thanks. Read both 45 day rule and dividend recycling and understood the 45 day rule....basically hold the shares for 45+1 day to utilise the franking credits....

Regarding dividend recycling....I don't understand

selling shares that are held on the Australian Securities Exchange (ASX) and have become ‘ex-dividend’, and then
purchasing some substantially identical shares using a special ASX trading market.

i thought after the ex dividend date all purchases after that aren't eligible for dividends...OR are they suggesting once company publishes their ex dividend date (e.g. week in future) trader sells all shares and buy the same shares within two days... assuming both times shares are being hold for 45+1day days so franking credits can be utilised for both holding of same share.....is that right???

 

@Paul...even if I don't want to borrow and use my super money the difficulty i find is my super company doesn't allow me to trade shares unless of course i go SMSF way. I think buying this high yielding (with franking) shares provides good option to utilise the low tax environment like super and build good balance....I wonder if there are any standalone companies provide this service to use super money without switching to them (like secondary super account)...

That's how i understand this....all franking credits has 30% tax attached. Super being 15% tax you end up getting some as refund...

 

This is true, the thing the punter often overlooks however is grossed up yield when looking at yield percentage. As you know your 5% fully franked dividend is not equivalent to 5% term deposit interest, REIT distribution, unfranked div etc. former being akin to 7.14%. This is lost on many, and a bloody important point.

For Australian based income investors franking credits provide a free kick that overseas money cant access. So it makes sense when building a portfolio to bear this in mind. Those franked dividends are worth 42% more in the Australian tax residents hands than the foreign investor, and does tend to lead to overweighting of companies paying franked dividends. On the other hand, if investing with an income bias, and wanting global exposure it pays to look beyond the ASX regular suspects that don't pay franked divis (or limited franking) and broaden your horizon, there is no tax advantage in limiting oneself to the ASX International plays like Amcor or Brambles, when one gets the same tax treatment on divs as stuff like Johnson and Johnson or Nestle. Anyway, I digress.

 

Super is portable and you can consider a super provider that does allow direct shares to be purchased. A SMSF is not needed. You could transfer all or just some of your super to a new provider (watch for fees and loss of insurance).

Some funds that allow direct shares : ING / Australian Super. Many super providers will credit the divs as received and then credit the tax credits at a defined point in time (6mthly or annually)