Tax Tip 283: Franked Dividends- How much can you earn so you get all the credits back?

This sort of question might be relevant for a non-working spouse or for a family holding shares via a discretionary trust with adult children not working. How much can you earn from share dividends and not have to pay any tax and get back all the franking credits?

The answer is $15,318 worth of fully franked dividends

The next question is How much worth of shares will generate this income?

This will depend on the yield. Just divide $15,318 by the yield percentage.

If you get a 4% yield the amount would be $382,950 worth of shares

If you get a 5% yield the amount would be $306,360


Here are the calcs:

In the 2019-2020 financial year an adult resident can earn approx. $21,884 and pay no income tax:

If a person’s only source of income was fully franked dividends how much could they earn and not pay any tax?

Since dividends have to be grossed up to work out the table income we have to find out how much the dividend component of an annual income of $21,884 would be.

We switch calculators to Franking Credits Calculator | Pearler and play around.

This shows if we earned dividends of $14,318 would have $6,564 in franking credits attached to them so that would make a taxable income of $21,883


This means if an individual with no other income earns $15,318 in fully franked dividends they would pay no income tax and they would get back $6,564.86 in tax paid by the company they have invested in. Their cashflow would be $21,883.

 

Its not $14318. Its around $15318. The franking credit calc is wrong. Its Div x 30/70 (or 1.42857). [FF Div / 1.42857 = Franking Credit] That grosses up to $21,844 at which tax payable may equate to the low income tax offsets so all franking is paid as a refund.
It can be much higher than $15318 for taxpayer aged under 75.

I refer to taxpayers who can make a personal concessional super contribution. Why woud they do this ? - To increase the dividend refund. The common belief is that the cap is $25K which is not correct. A taxpayer with under $500K in super may make a higher catch up concessional contributions and claim more than $25K per annum (at least in one year). There is also a catch with concessional contributions that a super deduction cannot create a tax loss. So getting it right is important.

Financial and or tax advice may assist this. Remember that for each $100 of super deduction you can earn another $70 of franked div and get a further $30 tax refund. So a taxpayer could produce $25K of franked divs. Contribute it all to super. Draw $21,250 back out (after making the tax deduction notice and starting a pension ) and lodge a return for a $10,714 refund. Each. Even larger if a catch up contribution can be used.

Warning : The present economic circumstances will greatly alter franking of dividends. How much ? Nobody knows. Companies that have paid fully franked divs may soon pay partly franked or even unfranked divs or even no divs. Even CBA may pay a reduced dividend but its likely to remain franked for now. Some like Westpac, WES etc stripped their franking balances prior to the last election in case the ALP won.

 

Thanks Paul that was a Typo.

I notice that my pics didn't appear above. I will try to add them below

 

This is probably a silly question but here it goes

If one earned $180,000pa in fully franked dividends only (no other income) - how much tax would they have to pay?

At the current year tax rate the tax payable is $54,097 or about 30% (excluding levies and fees) - so will franking credits from the dividends mean no tax is payable? The company would have already paid 30% tax.

This of course in the context of a $3.6-4.2m share portfolio (approx 5% + / - divi) and not out one’s own company (bucket or otherwise) where they would have had to pay the 30% tax first.

No deductible expenses for the purpose of this example

 

You pay tax on the full amount, not the $180k plus franking credits.

But yes $180k in dividends, be it from shares or working has an average tax rate of 30%.

So in this scenario, your $4.5m portfolio has paid 4% dividends with $126k in cash going to you, and $54k being held by the ATO on your behalf.

 

Wouldn’t you have $54k in franking credits to go against your $54k liability? Therefore making the $180k essentially ‘tax free’

 

First you have to gross up the $180,000 - the franking credits get added on making the taxable income
$180,000 + $77,142 = $257,142
see Franking Credits Calculator | Pearler



Then you work out the taxable on $257,142
Which you can do at: TaxCalc - Calculate your tax. 2019-2020 financial year and it $93,953


So $93,953 in tax is payable but the franking credits can be used to reduce this so deduct them

$93,953 - $77,142 = $16,811

Sot the amount of tax you would have to pay, after taking franking into account, is an extra $16,811

This is called 'top up tax'

 

Brilliant thanks Terry

 

You're confusing total income with income paid.

The $126k is "tax-free", you never see the $54k. If the business paid you the full $180k with no franking credits (say an international ETF), then you'd owe $54k.

Total income is $180k. You "see" the $126k which is grossed up to $180k. $180k is the income which the government sees (with $54k tax already paid, which means you net out at near $0 tax owed)

 

On the top marginal rate the tax shortfall on fully franked divs is approx 26%. Hence 56% overall. Varies a little.