Fully franked shares and dividends

Hi again,
So last week I was talking to some relatives about shares. They have investments in shares and property and have done very well over the past 10-15 years out of both. Anyway, we only had time for a brief chat about shares and my uncle was telling me about fully franked shares. I didnt quite understand the concept but does this mean if you buy fully franked shares then you dont have to pay any tax because it has already been paid before you buy them? And also, they say now they are retired and they live off their dividends, I was just wondering approx how much would you have to buy worth of shares to be able to live off the dividends? Say if you were after 20k a year or so. I will eventually ask them this but they're doing a brief stint o/s at the moment so I'm up for any tips/advice. Thanks! *Sarah

if you buy fully franked shares then you dont have to pay any tax because it has already been paid before you buy them?

Fully franked div's are benefical only to those with relatively low income
The company pays tax at 30%, so if your tax rate is 30% you dont pay tax on the dividend, if your tax rate is lower than 30% you can offset the tax paid by the company against tax you have to pay
If your tax rate is higher than the company tax rate then you will need to pay some tax on the franked div.

Best to look at the ATO site I reckon


I was just wondering approx how much would you have to buy worth of shares to be able to live off the dividends? Say if you were after 20k a year or so. I will eventually ask them this but they're doing a brief stint o/s at the moment so I'm up for any tips/advice.

The major banks are yielding around 5.0% , property trusts 8-9% i think
so if you held the major banks you'd need around $400,000, property trusts around $250,000. Thats for fully franked divs, of course if this was your only income the effective yield would be higher due to the tax paid by the company being at a higher rate than you marginal tax rate

again check the ATO site for more details

Also buying for yield is not always a good idea, if property turns down, their could be capital losses from holding property trusts. Also banks have their own issues.

Dear BVBFAN,
Thanks for the reply. I am beginning to understand a little more now. But will def. head over to the ATO site to find out some more info. I am on reasonably low income. I earn around 25k a year.

Sarah,

Please remember that this is a public forum and anyone could be reading.

You may want to refrain from mentioning any arrangements you might have that you'd prefer certain other people or agencies not to know about.

Cheers,
GP

Moderators: it may be of benefit to everyone concerned to watch for comments of this nature and edit them out when they appear.

I find it amusing when people go to great lengths to avoid tax when there are so many legal ways to not pay it.....

:D

Sarah,

Please remember that this is a public forum and anyone could be reading.

You may want to refrain from mentioning any arrangements you might have that you'd prefer certain other people or agencies not to know about.

Cheers,
GP

Moderators: it may be of benefit to everyone concerned to watch for comments of this nature and edit them out when they appear.


GreatPig, what in this thread needs moderating?

GreatPig, what in this thread needs moderating?

It's already been moderated. :D

Joe,

It might be helpful, as I see in other forums, to add an edit comment when a message has been edited, indicating the fact it's been done and why.

Perhaps something like:

[Edited: Revealed personal information]

Cheers,
GP

Joe,

It might be helpful, as I see in other forums, to add an edit comment when a message has been edited, indicating the fact it's been done and why.

Perhaps something like:

[Edited: Revealed personal information]

Cheers,
GP

Ooooops! Forgot to add the reason. Fixed now.

Thanks GP! :D

Hi again,
So last week I was talking to some relatives about shares. They have investments in shares and property and have done very well over the past 10-15 years out of both. Anyway, we only had time for a brief chat about shares and my uncle was telling me about fully franked shares. I didnt quite understand the concept but does this mean if you buy fully franked shares then you dont have to pay any tax because it has already been paid before you buy them? And also, they say now they are retired and they live off their dividends, I was just wondering approx how much would you have to buy worth of shares to be able to live off the dividends? Say if you were after 20k a year or so. I will eventually ask them this but they're doing a brief stint o/s at the moment so I'm up for any tips/advice. Thanks! *Sarah
If you can get hold of a copy of the AFR Investor section for Sunday 8 May, you'll find a good summary of how dividend franking works - might be easier to absorb than the ATO website.

Note particularly the last paragraphs about the tax effectiveness of franked dividends for shares held in a super fund. I've heard (at least 3rd hand, but it's a good story) of a doctor who got $90,000 in tax credits one year - some low income!!

Sorry I couldn't find the article quickly on the Web. I saw it in the AFR Investor section of yesterday's Sun Herald. I expect it's also in the Sunday Age - don't know about other states.

Ghoti

Oh my god, a 22 year old female interested in the stock market, you are a rare find!

Sarah,

try Noel Whittakers books (making money made simple etc) if you need a better general understanding of things (not saying you do or you dont). I got this book as a present when i was 15 and it really whet my appetite. Beware though that he is quite conservative particularly about share and option trading. i know there are people on this site that earn a good living from it.

Fully franked divs are great if your on a low income - I mean low. I div strip for my pensioner mum - works a treat with warrants. Here is how it works:

If you earn say $10,000 in income from a job and recieve fully franked divs of say $2000 - which means also that you have received a div of approx $5000 you have received a total of $7000 in additional income. This $7000 gets added to your earnt income - $10000 = $170000 taxable income. On this you would pay tax of about $1870 now you can subtract the fc of $2000 so your tax refund would be $130. Now if you did not have the fc your tax payable would be $680 - mind you you are using a swag of money to earn $5000 in divs. Now you say you earn $250000 so your taxable income is approx $3600.
Now you receive divs and fc of $7000 so now your taxable income is $32000 so tax is approx $4200 less fc of $2000 = $2200 tax you have to pay. Also remember as your income gets higher so does the Medicare Levy. If most of your income is in the 30% bracket the strategy doesnt really work unless you can claim a heap of deductions for trading.

Oh my god, a 22 year old female interested in the stock market, you are a rare find!

Be nice fleeta, young women are people too and do trade ;) - Louise Beford may have been 22 once as well- you never know....

btw, Fleeta is one of our resident comedians (together with SOB- 'son of baglimit', the man formerly known as 'baglimit'...known to win the odd tipping comp here on ASF...)

btw, (if Sarah1983 is still here) the search function will bring up lots of info on dividends and browse the beginner forum too.

On the subject of age, suffice to say that I have personally witnessed an 18 year old (or thereabouts) dominate debate, to the point of leaving the others completely out of their depth, in a room full of several hundred people including the official representatives of both sides of the debate and also both Liberal and Labor Members of Parliament.

The individual in question, an unemployed male, also had shoulder length hair, was shorter than average and a bit over weight.

NEVER judge on the basis of age, appearance and so on IMO. Always consider the possibility that the individual in question does not in any way fit the sterotype. They may not be common, but exceptions do exist and from what I've seen they are the ones who ultimately end up in that small group in society which makes things happen.

hey fleeta - hands off - she's mine.

as a 'resident comedian' you can guess the intention of that comment !!

didnt think you liked 'gurls' fleeta, just sat at ya pc waiting for more of my wonderful tips - and yes its getting close now - only dayz away.

p.s. thanks for the rap RK

Be nice fleeta, young women are people too and do trade ;) - Louise Beford may have been 22 once as well- you never know....

btw, Fleeta is one of our resident comedians (together with SOB- 'son of baglimit', the man formerly known as 'baglimit'...known to win the odd tipping comp here on ASF...)

btw, (if Sarah1983 is still here) the search function will bring up lots of info on dividends and browse the beginner forum too.

You're killing me Rich Kid, all this time i've been trying to add value to the forum through my intellegent observations and knowledge of the market only to be branded a 'comedian'!

Just kidding...anyway, don't pigeon hole me with Baglimit, i'm heaps funnier than him!!

hey fleeta - hands off - she's mine.

as a 'resident comedian' you can guess the intention of that comment !!

didnt think you liked 'gurls' fleeta, just sat at ya pc waiting for more of my wonderful tips - and yes its getting close now - only dayz away.

p.s. thanks for the rap RK

Hurry up with the tip already, you are such a tease!

FYI - I have a long-term girlfriend and she was the worst financial investment I made.

see - typical fleeta - has a 'gurl' but treats her like a commodity - why not stick to options where theres always a get out - and they are much cheaper if everything fails !!!

fleeta - that new tip is right under ya nose.

Fully franked divs are great if your on a low income - I mean low. I div strip for my pensioner mum - works a treat with warrants. Here is how it works:

If you earn say $10,000 in income from a job and recieve fully franked divs of say $2000 - which means also that you have received a div of approx $5000 you have received a total of $7000 in additional income. This $7000 gets added to your earnt income - $10000 = $170000 taxable income. On this you would pay tax of about $1870 now you can subtract the fc of $2000 so your tax refund would be $130. Now if you did not have the fc your tax payable would be $680 - mind you you are using a swag of money to earn $5000 in divs. Now you say you earn $250000 so your taxable income is approx $3600.
Now you receive divs and fc of $7000 so now your taxable income is $32000 so tax is approx $4200 less fc of $2000 = $2200 tax you have to pay. Also remember as your income gets higher so does the Medicare Levy. If most of your income is in the 30% bracket the strategy doesnt really work unless you can claim a heap of deductions for trading.

Could Chren or someone else please explain that example to me again please? I couldn't quite work it out but I am keen to see how it works...maybe the terminology should be more particular. So the 'job' is a stock holding/instalment warrant??, and the $2k is the value of the franking credit, is that '$10k' meant to be $100k (ie a typo?) with a 5% yield of $5k..? I know how to gross it up so I get that part but it doesn't quite gel yet. Apologies for the ignorance.

Thanks!

Hi RichKid.
No the “job” is just employment.( no reference to use of warrants in his example )
The person earns $10,000 from other employment. The person also receives a $5,000 dividend with a $2,000 attached franking credit.
This makes the persons total income $17,000.
Chreen calculates that this person would pay $1,870 tax on the $17,000 taxable income.
The $2,000 franking credit is then applied as a rebate against the $1,870 tax that was payable and the person gets a tax refund of $130.

He also calculates that if you had income of $10,000 + $5,000 dividend(without franking credit) your taxable income would be $15,000 and tax payable would be $680.

Just note that franking credits are good for any income - not just low. Basically the tax on the dividend has already been paid at the company tax rate (30%). So as already stated, if you are on a low income - marginal rate < 30%, you get a refund, if your marginal rate is 30%, you don't pay tax on it, and if your marginal rate > 30%, most of your tax for the dividend is already paid.

(Consult a qualified accountant before relying on this information.)

spot on markrmau :)

Just note that franking credits are good for any income - not just low. Basically the tax on the dividend has already been paid at the company tax rate (30%). So as already stated, if you are on a low income - marginal rate < 30%, you get a refund, if your marginal rate is 30%, you don't pay tax on it, and if your marginal rate > 30%, most of your tax for the dividend is already paid.

(Consult a qualified accountant before relying on this information.)

For those not aware of the history behind franking credits, the gov't introduced them years ago to eliminate the anomaly where company profits were being taxed twice - firstly the profits were taxed when they were still in the company hands and then again in the shareholders' hands when the after tax profits were distributed as dividends.

So to simplify the effect of the the after tax calculations for shareholders regarding franking credits:

1. The company pays tax at 30% and then distributes after tax profits to shareholders.

2. So if the shareholder's marginal tax rate is 30% then he/she will pay no tax at all on their dividend since the company has already paid the tax earlier on that dividend prior to paying it out to shareholders.

3. If the shareholder's marginal rate is less than 30% then the refund the shareholder receives on that dividend is 30% minus their marginal tax rate.

4. If the shareholder's marginal tax rate is greater than 30% then the amount of tax the shareholder pays on that dividend will be their marginal tax rate minus 30%.

cheers

bullmarket :)

In case anyone still uses the traditional 'shoe-box filing system' ;) and finds at tax time that they have 'inadvertantly' misplaced any dividend statements :D then the formula to calculate the franking credits that might have been attached to the dividends is:

franking credits = (franked portion of dividend) / (1 - company tax rate) x (company tax rate)

eg.....if franked portion of dividend = $100 and is full franked at a 30% company tax rate

then franking credits = 100 / (1 - 0.3) x 0.3 = $42.86

cheers

bullmarket :)

In case anyone still uses the traditional 'shoe-box filing system' ;) and finds at tax time that they have 'inadvertantly' misplaced any dividend statements :D then the formula to calculate the franking credits that might have been attached to the dividends is:

franking credits = (franked portion of dividend) / (1 - company tax rate) x (company tax rate)

eg.....if franked portion of dividend = $100 and is full franked at a 30% company tax rate

then franking credits = 100 / (1 - 0.3) x 0.3 = $42.86

cheers

bullmarket :)

That would work work in many situations but
the only problem with that is that some companies provide unfranked dividends!

I will need to move over to companies that pay good dividends when our Super moves in to the retirement stage (a few years of yet though) so Bullmarket where have you found the best info source for this - I think this is your main strategy :confused:

Hi propsector

That would work work in many situations but
the only problem with that is that some companies provide unfranked dividends!

I will need to move over to companies that pay good dividends when our Super moves in to the retirement stage (a few years of yet though) so Bullmarket where have you found the best info source for this - I think this is your main strategy :confused:

Nowadays I mainly use Commsec's Advanced Search tool and/or the Advanced Finder Tool on the investor.ninemsn (http://investor.ninemsn.com.au/investor/shares/finder/default.asp) website. Both search engines are very similar and appear to me to search the same Aspect Huntley database, but I'm not sure.

Anyway, the investor.ninemsn engine offers a few more search criteria and also allows you to download the search results into a spreadsheet (although I find downloading into Excel doesn't always work and I have to copy 'n paste :banghead: )

Both Commsec and investor.ninemsn will allow you to build a search to look for companies with say a min 5% yield and are 100% franked - or whatever other search criteria you like.

When I subscribed to the old 'Shares' mag I used to also download their tables into spreadsheets from their website. But I don't subscribe to the new SmartInvestor mag so I can't download the shares tables anymore.

But the above 2 search engines easily meet my needs.

hope this helps.

bullmarket :)

ps....you still look great in your photo ;)

Thanks very much for the help everyone, should be able to digest it now.

ps....you still look great in your photo ;)


Well I am thanking you for that - for all the advice, that is! ;)

no problem prospector :)

To live of dividends (assuming you live off $20,000 a year) you will need about $400,000. It depends on the performance of shares and the dividends each company pays, but $400,000 is roughly right.