Dividend franking credits

My understanding...

Companies taxable income is $10m, they must pay $3m company tax to ATO.

This $3m can only be distributed to shareholders via fully franked dividends...otherwise it has absolutely no use to anyone whatsoever. If not used in current year it can be carried forward indefinitely.

The company can

a) pay a $7m unfranked dividend to shareholders. Shareholders receive $7m cash in bank account with no franking credits. Shareholder is taxed on $7m with no franking credits to deduct from tax they have to pay.

b) pay a $7m fully franked dividend to shareholders. Shareholders receive $7m cash in bank account and a $3m franking credit. Shareholder is taxed on $10m, and $3m franking credit is deducted from amount of tax they pay.

 

I posted the facts Bas, the tax free component of your super, is passsed on tax free, the taxable component is taxed at 15% + medicare levy before it is distributed to the estate.

The post you put up was actually dishonest, if the reporter new the facts and if she didn't she shouldn't write a story on a subject she obviously has very little understanding of.

My guess is it was written to deceive, because even someone with a basic understanding,
knows the basic rules.

 

Politics and arguments for or against this policy aside, the logical implications are that investments which pay franked dividends are about to lose capital value relative to those which pay unfranked dividends.

A classic case of taxation distorting the underlying market.

There are ways around it in practice, just don’t invest in anything paying franked dividends unless the yield is high enough to stack up, but the principle is just silly really.

 

Not that im special but the above ^ could very well be the scenario i find myself in soon, i was planning on living on my investments outside super for a couple/few years and working casually a bit here and there, earning maybe 12K in wages, 6 or 7K trading profits and 6 or 7 K in dividends.

Losing the credits would be a hit to the bottom line, would end up being like a 8% pay cut on a very modest yearly income, options would be few - i dont like the idea of being forced out of the market and having the control of my money taken away from me and given to industry morons.

 

You are the exact situation that seems so wrong to me.

I've said all I can say on it really. It's a policy that hits those in situations like yours harder than anyone else.

 

Basilio,

I still cant find any info in these documents or on Grattan website that they are using the ABS survey.

They are declaring it is their interpretation of the survey though.

Whats your thoughts about this?

cheers

 

You're telling me that BHP isn't paying company tax?

 

TL I'm not sure what you are missing. When you look at the bottom of the graphs I used it says
"Source - Survey of Income and Housing 2014-5; Grattan Analysis." The ABS survey which they used for their research can be found here http://www.abs.gov.au/household-income.

The information comes from the survey. It is put into graphical form by the researchers

View attachment 92028 View attachment 92029 View attachment 92030

 

TL you can go the Grattan website and see their assurance and cross checking of research projects they undertake. They don't just let a couple of people loose to write up a paper and then publish.

The papers are checked internally and externally through other research bodies who check the data and critique the accuracy of the figures.

https://grattan.edu.au/about-us/quality-assurance/

 

Why would someone go to the Grattan institute? They are as unbiased as the Murdoch press.IMO

 

Is there an external group for finance/economic matters

 

According to the Murdoch Press.
Great article in the Age today from Chris Pyne.

 

It appears, given all the bolding, that you have something against the same tax scale being applied to investment income as to earned income. I don't understand why that is, but surely what you want is to change the tax scales then?

Otherwise, someone who doesn't work but gets $10k/year in rent on an investment property pays absolutely nothing in tax and gets the full $10k, while someone who currently earns $10k on BHP shares will in future earn only $7k. How is that massive market distortion a good thing? Why do you want yet another force artificially inflating the property market?

 

https://www.theage.com.au/business/...ge_busnews_am&instance=2019-03-18--19-24--UTC

Westpac shows the way for banks to beat Labor on franking
By Lucy Battersby
March 19, 2019

Westpac's move to engineer three dividend payments in one financial year will "hopefully" spark similar moves from other big banks, says one leading fund manager, who described the tactic as a way to beat Labor's pledged changes to franking tax policy.

Westpac recently announced it would bring forward its interim dividend payment date by nine days to June 24 giving shareholders a one-off third dividend within the current financial year following an interim dividend last July and a full year dividend paid in December.

The bank has not linked the payment to Labor policy to end cash refunds on franking credits instead saying it was to speed cash returns to shareholders.

On Monday, Mark Freeman, chief executive at the the $7 billion Australian Foundation Investment Company (AFIC) said he believed Westpac had made the change with an eye to Labor's policy.

"What [Westpac] are saying, is that if there is a change in government and a change in franking rules you can still get a refund on the franking for dividends received up to the 30th of June this year," he told The Age and the Sydney Morning Herald.

Mr Freeman said he hoped NAB and ANZ Bank will join Westpac in bringing forward the interim dividend payment date to early June.

I would hope that the others are looking at it as well. Maybe it's just a matter of time.

"I presume the other [banks] are looking at it, you would hope. I guess [Westpac] have just looked it and said 'yep that's the right thing to do' and I would hope that the others are looking at it as well. Maybe it's just a matter of time."

Westpac declined to comment on Monday.

AFIC, a staunch public critic of the Labor policy, also on Monday released the results of a survey it conducted of 14,300 investors which found retirees living off their investments relied on the current 18-year-old franking credit policy for "a modest quality of life".

The survey was sent to about 160,000 investors in AFIC and its related Mirrabooka, Amcil, and Djerriwarh funds.

Hundreds of shareholders attended meetings in Melbourne on Monday to express their distress and anger about the proposed change.

"[Shareholders] don't understand why this policy is being put on them," Mr Freeman said.

"Franking credit refundability has been in place for 18 years and it forms a key part of their income. And you are basically taking away income that they use to live off. It is expensive to live in retirement...If you run a conservative portfolio the yields are very low. You don't earn a lot of income."

Mr Freeman said elderly retirees do not understand why they were being "attacked" and targeted by Labor after being incentivised for decades to build self-managed investment portfolios based on franking credit refunds.

"That's just the system. The system is the system," he said.

Labor's Treasury spokesman Chris Bowen repeated earlier comments that AFIC and its related funds have already made public comments and given evidence to the "politicised" parliamentary inquiry.

"Politics is about choices – and Labor makes no apologies for choosing schools and hospitals over tax concessions that overwhelmingly benefit the wealthy," Mr Bowen said.

"The cost of excess imputation credits will soon outweigh what the Commonwealth spends on schools or child care. That’s unfair and unsustainable."

"The current system encourages people to be overweight Aussie shares meaning they have not adequately spread their risk."

 

Would be nice if the big 4 paid their divvies on a quarterly basis IMV.

 

this will help some if the franking credit changes come to pass, but it will hurt others regardless of whether the franking credit refund remains or not.

now investors will have to pay tax on 3 dividends this FY instead of 2, and that 3rd dividend is going to be at your marginal rate since this is unexpected additional taxable income for the FY.

whereas keeping it the way it is now gets you an extra 12 months to make a return on that capital before having to pay tax on it. may not amount to all that much in an individual year, but if all 3 banks did it and you compound the effects of that over a couple of decades for a portfolio with a significant bank holding, it probably adds up to something meaningful.

 

????
confused by that sharkbloke.
they put the cash in ur bank account in June for this and peeps do not do tax till Sept or whatevs - so u have cash to cover tax if u need to .......

this 3 divs in a fiscal is a one off as all following years only have 2 div pays .......... so tax year 19/20 will only have 2 divs.

 

Won't it be just one (final) dividend for 19/20 because the interim is being brought forward into this financial year? They are already at a payout ratio over 81%

 

That is true, I think hellou was just highlighting, that the change to three dividends was a one of.

 

the part where you get 3 dividends this FY is a once off. the part where you have to pay tax on the interim div 12 months earlier than you had to previously will continue year after year until they change it back. unless they meant that they're only doing it for this year? i assumed they intended it (late June payment dates) to be an ongoing policy, as if they put it back to early July next year, it would be an obvious political shot which i would've thought companies try to avoid.

what i meant was:
if the dividend gets paid on July 1 2019, you don't pay tax on it until sometime in Nov 2020, because you can book it in the 2019-2020 FY.
if the dividend gets paid on June 28 2019, you have to pay tax on it in Nov 2019.
so in the former case, you get 12 extra months to make a return on the money that you would have paid out as tax 12 months earlier in the latter scenario.

just to be clear - given that the big bank dividends are fully franked, this will only be an issue for investors on the higher tax brackets, that's what i meant by "it will hurt others".

now i haven't quantified the effect of this, which i kind of implied in my previous post. nor am i particularly keen to work up a hypothetical example since it won't affect me either way (i moved overseas several years ago, may come back one day though). but one thing i've learned over the years is that one should never underestimate the effects of compounding on seemingly small amounts/percentages, it can turn out to be quite surprising.