Tax Tip 114: Franked Dividends and Tax

Discussion in 'Accounting & Tax' started by Terry_w, 3rd May, 2016.

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  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Its also important the investors dont compare cash rates and chase yield by considering FF shares as an equal. Cash has a capital guarantee or sorts but shares do not.

    A year back the grossed up 9% yield on CBA was very tempting. Yield is now around 5.7% but the value of CBA has dropped 12.8% from $83 to $73.63.

    That said I have many clients who dont care what the capital value of CBA is. They paid $5.40 back in 1991. These shares now worth $73+ and the yield they see is around $4 a year (ignore the franking). They receive income of 90% per annum.
     
  2. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    It's related to extended settlement periods for derivatives, which can be used for buying the second tranche of shares.
     
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  3. S0805

    S0805 Well-Known Member

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    loosing insurance is my concern. I may have to run the numbers of opening multiple super fund (fees etc...) than current where similar strategies can be used...
     
  4. S0805

    S0805 Well-Known Member

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    Here are the numbers used in book.....

    50000 shares purchased @ 27.81 = $1,390,500
    all this borrowed @ 6%IR costing = $83430
    CBA shares yield 5.5% = $76478 dividends
    Shortfall = $6952 (83430-76478)

    Shares have $32776 franking credits attached....
    So total income = $109254 (76478+32776)

    Tax time = $109254 (income) -$83430 (interest on borrowed money) = $25824 is net profit
    Tax payable on profit of $25824 is $12524
    Franking credit @ work = $12524 (tax payable) - $32776 (Franking credits) = - 20252
    This 20252 will bes used to offset his other tax bill....

    Summary, by borrowing entire purchae price he has $13300 in his pocket ie. $20252 (surplus Franking credit) - $6952 (shortfall)

    p.s. This is not advise....taken from Noel whittaker's book....
     
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  5. The Falcon

    The Falcon Well-Known Member

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    Slightly different discussion, as I was just posting a simple example.....but yes they aren't equal. One wont keep pace with inflation and will erode your wealth in the medium-long term, and one is subject to short-medium term price volatility, but will outperform fixed interest over the long term and grow your wealth. Hence, equity risk premium.
     
  6. Chris Au

    Chris Au Well-Known Member

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    Reinvigorating this great thread.

    I was under the impression that income earned by assets held by the trust could be distributed to beneficiaries in the trust as the trustee sees fit, but are you suggesting here that the dividends and franking credits (another source of income?) would not be distributed to beneficiaries? How would these flow through to the beneficiaries if the trust bought shares with dividends and FC payable?
     
  7. Chris Au

    Chris Au Well-Known Member

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    @Terry_w , @Paul@PFI , other experts, any comments on whether the trust can distribute dividends and franking credits earned through the trust holding assets that generate those dividends/FCs?
     
  8. Terry_w

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

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    I am not sure i understand the question but a trust could distribute dividend income and franking credits.
     
  9. Chris Au

    Chris Au Well-Known Member

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    Thanks @Terry_w , I may be confusing things here. I was following up on Skilled Migrant's post 20 -
    Where you replied (post 28) -

    Indicating to me that there may be different rules around distributing dividends and franking credits to beneficiaries under a trust structure.

    Thanks for clarifying that dividends and FCs can be distributed to beneficiaries as required.
     
  10. Terry_w

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

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    Franking credits are a form of income and if the deed allows it could be distributed to beneficiaries different to receiving the income of dividends if the deed allows it. But I have no experience in this area and Paul would know more as a tax agent.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Terry - correct. Depends on deed and tax situation of individual also (ie non-resident etc)
    A complex area that is also potentially affected by Part IVA too.
    Failure to correctly resolve distributions can impose a high tax rate too.
     
  12. Chris Au

    Chris Au Well-Known Member

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    Thanks for the advice @Terry_w and @Paul@PFI.

    Sounds as though it is achievable and I will take this forward as I meet with tax specialists to discuss my specifics.

    Cheers,
     
  13. PerthPadawan

    PerthPadawan Well-Known Member

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    Paul or others, exactly what is the cut-off date for the 45-day rule if you have not sold them yet buy the end of the tax year?

    For example:
    Person A buys shares 1 June 2017, shares go ex-dividend 15 June: They pay dividend + franking credits (below $5,000) 20 June.

    If I file a tax return on 1 July, I have not held the shares for 45 days yet - so I cannot claim credits?

    If I wait till 1 August to file, can I claim the credits?

    PP
     
  14. Terry_w

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

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    45 days from date of purchase not tax return
     
  15. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The 45 days rule can span two tax periods. So if you buy shares on 20th May and a FF div is paid on 10th June you cant sell before 5th July. The 45 days is the period you must hold the shares risk free....If you do a sharebuyback for 47 days it fails if the agreement existed at start since there was no "at risk" period of 45 days. (Its 90 days for pref shares)

    Of course there is an exception to the 45 days rule !!
    Small PERSONAL investors (ie not a company, not a trustee, not a smsf) with franking credits under $5k etc...Beware that many fund manager and broker reports exclude div credits in their reports under the 45 days rule ignoring this issue. Taxpayers need to adjust and still claim if eligible. BT are a good example.

    You and your shares 2013-14
     
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  16. PerthPadawan

    PerthPadawan Well-Known Member

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    Thanks Paul, so you would be able to claim those credits if you filed a tax return on 1 July, since you hadn't sold? Or do you need to wait till 6 July to file a return to show the ATO you held for 45 days.

    PP
     
  17. Redwing

    Redwing Well-Known Member

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    @Terry_w

    Thanks Terry you are a veritable font of information and the site is all the better for it
     
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  18. PerthPadawan

    PerthPadawan Well-Known Member

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    Any final determination on this question? Thanks
     
  19. Terry_w

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

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    Yes u would just assume you are holding for 45 days unless you are not
     
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  20. PerthPadawan

    PerthPadawan Well-Known Member

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    Thanks Terry
     
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