How to reduce tax using franking credits?

redbyrd6757 · 4 January 2011

hi i'm a complete newbie so please be patient with my dumb questions. Is there a software program/website that can calculate how much franking credits is required to reduce tax to zero? for example - how many westpac bank shares would i need to buy to obtain enough franking credits to reduce tax from $3,000 to zero? (based on current dividend rates of course)

absolute1 · 4 January 2011

ur looking at alot of shares

last div's were .74 per share and .65 per share.
total div 1.39cents per share for the yr

ur looking at around 5035shares

5035*1.39 = 6998.65 div, this equals 70% because 30% tax has already been taken out

fr cr = (6998.65/70)*100 - 6998.65
= 3009.42 frankin credit which u get bak at tax time

5035 shares at current price say $22.22 per share is $118,777 of westpac shares

but u will also have to take into consideration other deductions and tax offsets which u may be entitled to so u may most likely not need as many shares

hope that makes some sense

luke256 · 4 January 2011

If your earning over $37,000 of wages or other income then additional dividends will not reduce tax liabilty to NIL no matter how many shares you buy. This is because at 37K the 30% tax rate kicks in and your franking credits are also 30%. This is based on 2011 tax tables.

redbyrd6757 · 4 January 2011

absolute1 said:
ur looking at alot of shares

last div's were .74 per share and .65 per share.
total div 1.39cents per share for the yr

ur looking at around 5035shares

5035*1.39 = 6998.65 div, this equals 70% because 30% tax has already been taken out

fr cr = (6998.65/70)*100 - 6998.65
= 3009.42 frankin credit which u get bak at tax time

5035 shares at current price say $22.22 per share is $118,777 of westpac shares

but u will also have to take into consideration other deductions and tax offsets which u may be entitled to so u may most likely not need as many shares

hope that makes some sense

thanks - i was looking for the formula to work it out. so are you saying if i want $3000 of franking credit i will need to receive approx $7000 in dividends? (won't be buying that many w'pac shares!)

redbyrd6757 · 4 January 2011

luke256 said:
If your earning over $37,000 of wages or other income then additional dividends will not reduce tax liabilty to NIL no matter how many shares you buy. This is because at 37K the 30% tax rate kicks in and your franking credits are also 30%. This is based on 2011 tax tables.

does 30% franking credit also apply for smsf which is taxed at 15%?

luke256 · 4 January 2011

According to my 2010 Master Tax Guide, the 30% franking credit is still available even thou the complying SMSF is only taxed at 15%.

I'm not licensed to give advice so it would be best to give your accountant/advisor or ATO a call to confirm this.

absolute1 · 4 January 2011

yeah thats right u need about $7000 in dividends to get your 3k franking credit.

be carful the % of franking is not the same for all companys some are not franked some are at 50%, 75% franked etc if you look up the company they should say what the franking % is.

in addition i believe even if u make over the 37k mark u still can get your tax to 0. just because you make 37k in a year doesnt mean your taxable income will be 37k depending on your circumstances and deductions available to you.

pixel · 4 January 2011

redbyrd6757 said:
hi i'm a complete newbie so please be patient with my dumb questions. Is there a software program/website that can calculate how much franking credits is required to reduce tax to zero? for example - how many westpac bank shares would i need to buy to obtain enough franking credits to reduce tax from $3,000 to zero? (based on current dividend rates of course)

If you have a tax bill of $3,000, you won't ever be able to reduce it to zero by claiming Franking Credits. At last year's tax tables, you must have earned at least $26,000 in order to be charged $3,000 income tax. ($6,000 taxfree threshold, 15% tax)
If you want to receive $3,000 franking credits, you must get $7,000 fully franked dividend; but the Franking Credits of $3,000 are added to the dividend paid, and the grossed-up total of $10,000 is added to your $26,000 regular income. Now here's the rub: At $36,000 total income, you pay $4,350 plus 30% of the amount above $35,000, which comes to $4,650. Now you're credited back the $3,000 tax that the company has already paid before giving you the $7,000 dividend.
Thinks will only get worse if you add more dividends because the income tax rate increases while the franking rate remains the same.
The maximum tax you can offset is therefore $1,350, which is the tax you owe when your regular income is $15,000.

PS: for the current tax year, the $35,000 threshold has been moved up to $37,000; so you can offset up to $1,950

Tyler Durden · 4 January 2011

pixel said:
Thinks will only get worse if you add more dividends because the income tax rate increases while the franking rate remains the same.

Wait, so are you saying that the more money you earn, the worse the effect fully franked dividends have on your financial position?

awg · 4 January 2011

By having a SMSF in Pension phase the tax rate is low to 0%.

In the case of 0%, (for over 60), fully franked shares will have the 30% tax repaid by the ATO.

It is advantageous to hold shares individually, within the SMSF, as opposed to managed trusts.

They can be effectivly tax free.

I previously found this method to be effective, but more recently have focussed on smaller cap miners, as returns have been much better

pixel · 5 January 2011

Tyler Durden said:
Wait, so are you saying that the more money you earn, the worse the effect fully franked dividends have on your financial position?

If you earn over $80,000 a year, you'll pay an additional 8% of the grossed-up dividend on top of the franking credits.
(unless other relief prevails, e.g. if your shares are in a trust fund or SMSF; I made those earlier calculations on the basis of a run-of-the-mill salary earner with regular income tax liability)

Tyler Durden · 5 January 2011

pixel said:
If you earn over $80,000 a year, you'll pay an additional 8% of the grossed-up dividend on top of the franking credits.
(unless other relief prevails, e.g. if your shares are in a trust fund or SMSF; I made those earlier calculations on the basis of a run-of-the-mill salary earner with regular income tax liability)

So in that scenario, would it be better to put money into a 5% savings account rather than invested in shares?

pixel · 6 January 2011

Tyler Durden said:
So in that scenario, would it be better to put money into a 5% savings account rather than invested in shares?

definitely NOT!
Remember that you "earned" the grossed-up dividend. So, depending on the yield (assuming you pick shares on that basis), your interest can be much more than 5%. Check out Telstra's dividend yield...
The most important thing to remember is: Even the interest you earn on a Term Deposit or other bank account is considered income and will be taxed at your marginal rate.
If you take 30% tax rate out of a 5% term deposit interest, the net in your pocket is 3.5%.
If you take 30% tax rate out of a 7% fully franked dividend, all 7% remain in your pocket.
If your annual income is above $80K and the marginal tax rate has risen to 38%, the rates to compare are 3.1% vs 6.2%. IMHO that makes it a no-brainer.

Julia · 6 January 2011

Pixel, you're happy not to consider (in current market conditions) the potential for loss of capital?

Lucky_Country · 6 January 2011

Hi All just a quick question for example.

I have no job earn only fully franked dividends say $21,000 per year ($30,000 grossed up) does this mean I will get a rebate of $9000 at the end of the financial year from the ATO ?

Now if I am earning the same ammounts through my SMSF with a corporate trust as trustee would I earn $9000 back from the ATO ?

Cheers

pixel · 6 January 2011

Julia said:
Pixel, you're happy not to consider (in current market conditions) the potential for loss of capital?

I would definitely consider the Capital. But that wasn't the issue in this context.
Sorry - I should have bolded the assumption "(assuming you pick shares on that basis)"

Julia · 6 January 2011

pixel said:
I would definitely consider the Capital. But that wasn't the issue in this context.
Sorry - I should have bolded the assumption "(assuming you pick shares on that basis)"

Thanks, pixel. I know you would, of course.
I was just a bit concerned the OP might not consider that, despite a healthy yield, he could still go backwards much more than that income, if the market falls.

bellenuit · 6 January 2011

Lucky_Country said:
Hi All just a quick question for example.

I have no job earn only fully franked dividends say $21,000 per year ($30,000 grossed up) does this mean I will get a rebate of $9000 at the end of the financial year from the ATO ?

Now if I am earning the same ammounts through my SMSF with a corporate trust as trustee would I earn $9000 back from the ATO ?

Cheers

The tax on $30K (ignoring Medicare and Low Income offsets) is $3.6K (2011 rates). The franking credit you have is $9K, so you should be refunded $5.4K.

(The franking credits are added to your dividends to work out your taxable income: $30K. The tax payable on the taxable income is worked out: $3.6K. The credits are applied against this amount to work out what tax you owe or how much to be refunded.)

I am not aware the rules for SMSF, so someone else can answer that part.

How to reduce tax using franking credits?

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