Australian (ASX) Stock Market Forum

Maintain the current dividend imputation system

Jump to new
W

willy1111

Joined
17 June 2006
Posts
321
Reactions
323
I'm sure as an Aussie Stock Forum we are all aware of the Labour party's proposal to alter the current way franking credits may result in a tax refund for individuals and SMSF's.

Geoff Wilson from WAM Capital is taking the fight to them with a petition - has been getting a bit of media coverage, but only has 17,000 odd thousand signed the petition.

With more than a million people impacted by it, surely he should be able to get a lot more signatures, just a matter of getting the word out there.

For those wanting to sign the petition http://wilsonassetmanagement.com.au/petition/
 
I would've been happy to sign it had it been anonymous. No need for name and email.
 
Can anyone point me to something which explains exactly what is proposed?

By that I mean the details of exactly what’s proposes and how it works not “you’ll be $x worse off” examples and without political bias.
 
"Self-managed super funds are a major beneficiary of this practice, with 50 per cent of the benefit to SMSFs accruing to the top 10 per cent of SMSF balances – with some funds receiving cash refunds of more than $2.5 million a year."

maybe some could explain the above better

the main people who will get hit by it are those who have shares in a non-working partners name.

if your partner has no job, but has say a 200k share portfolio then they would get a cash refund of franking credits. If there dividends get over the yearly tax free threshold they start to have a tax liability which the franking credits offset against.
 
If the Coalition eventually get their company tax cuts then it will also mean a change resulting in people getting less franking credits.
 
Perhaps a few examples of a cash refund may help to explain Labours proposed policy.

A fully franked dividend means that the Company paying the dividend has paid Company tax of 30%. Or depending on turnover and the new small business company tax rates it may be slightly lower, but lets stick with the 30% for this example.

Franking credits are applied against the tax bill of the person/entity receiving the dividend - if the franking credits are more than the tax bill - the excess is refunded to the taxpayer - labour wish to stop the excess being refunded.

Example 1: Mary receives fully franked dividends of $35,000 (this is paid into her nominated bank account) and because it is fully franked she also receives $15,000 in franking credits. When Mary comes to do her tax, the dividends and franking credits are added together to 'gross them up' to become $50,000. Assuming Mary has no other income from a job, interest, no deductions - this will mean her taxable income will be $50,000 and at Marginal Rates that will mean her tax bill will be roughly$9K. Currently she gets to apply her $15K franking credit against her tax bill - and because it is $6K more than her tax bill - she receives the $6K as a tax refund. Under Labours proposal she will not receive the $6K refund - the government will keep it.

Example 2 : Mary's SMSF Superfund receives fully franked dividends of $35,000 (this is paid into SMSF nominated bank account) and because it is fully franked it comes with $15,000 in franking credits. If the fund is in Pension Mode (0% Tax) when the SMSF's tax is done, the dividends and franking credits are added together to 'gross them up' to become $50,000. Assuming the SMSF has no other income from interest, no deductions, no CGT - this will mean the SMSFs taxable income will be $50,000 and in Pension mode will mean a tax bill of $0. Currently the SMSF gets to apply the $15K franking credit against its tax bill - and because it is $15K more than the SMSFs tax bill - the SMSF receives the $15K as a tax refund. Under Labours proposal the SMSF will not receive the $15K refund - the government will keep it. If the SMSF were in Accumulation mode where 15% tax is applied to income, the tax bill would be $7,500, in accumulation mode the fund is also likely to be receiving contributions, so with Contributions tax the tax bill is likely to be higher - so SMSF's in accumulation mode will be less impacted than SMSF's in Pension Mode.

Example 3 : Mary receives fully franked dividends of $35,000 (this is paid into her nominated bank account) and because it is fully franked she also receives $15,000 in franking credits. When Mary comes to do her tax, the dividends and franking credits are added together to 'gross them up' to become $50,000. This time lets assume Mary has other income of $40,000 gross per year ($5,400 withheld as tax before she is paid) from a job with no other income from interest, or no deductions - this will mean her taxable income will be $90,000 ($40,000 from her job plus the grossed up dividends) and at Marginal Rates that will mean her tax bill will be roughly$22,600. Currently she gets to apply her $15K franking credit against her tax bill, and her employer has withheld $5,400 from her job income and sent to the ato - this totals $20,400 and is $2,200 short of her tax bill. This will mean she has to pay $2,200 to meet her tax bill meaning she has fully utilised her franking credits thus there will be no refund due. So in this scenario the Labour proposal will not impact her at all.

So who does it impact:

1. Those receiving fully franked dividends of less than $98K who have less than $37K from other income sources.

2. SMSF's in pension mode, to a lesser extent SMSF's in accumulation mode.
 
Toyota Lexcen said:
"Self-managed super funds are a major beneficiary of this practice, with 50 per cent of the benefit to SMSFs accruing to the top 10 per cent of SMSF balances – with some funds receiving cash refunds of more than $2.5 million a year."

maybe some could explain the above better
Click to expand...

Assuming an SMSF is in accumulation mode where 15% tax on income is applied. If it received a $12M fully franked dividend with franking credit of $5.142M - gross up income would be $17.142M. 15% tax on $17.142M would mean a $2,571M tax bill - applying the franking credit of $5,142M would result in a tax refund of $2.571M.

To receive a fully franked dividend of $12M at 5% yield would mean the fund would have to be worth around $240M.

Not to many funds would be in that bracket.
 
willy1111 said:
Perhaps a few examples of a cash refund may help to explain Labours proposed policy.

A fully franked dividend means that the Company paying the dividend has paid Company tax of 30%. Or depending on turnover and the new small business company tax rates it may be slightly lower, but lets stick with the 30% for this example.

Franking credits are applied against the tax bill of the person/entity receiving the dividend - if the franking credits are more than the tax bill - the excess is refunded to the taxpayer - labour wish to stop the excess being refunded.

Example 1: Mary receives fully franked dividends of $35,000 (this is paid into her nominated bank account) and because it is fully franked she also receives $15,000 in franking credits. When Mary comes to do her tax, the dividends and franking credits are added together to 'gross them up' to become $50,000. Assuming Mary has no other income from a job, interest, no deductions - this will mean her taxable income will be $50,000 and at Marginal Rates that will mean her tax bill will be roughly$9K. Currently she gets to apply her $15K franking credit against her tax bill - and because it is $6K more than her tax bill - she receives the $6K as a tax refund. Under Labours proposal she will not receive the $6K refund - the government will keep it.

Example 2 : Mary's SMSF Superfund receives fully franked dividends of $35,000 (this is paid into SMSF nominated bank account) and because it is fully franked it comes with $15,000 in franking credits. If the fund is in Pension Mode (0% Tax) when the SMSF's tax is done, the dividends and franking credits are added together to 'gross them up' to become $50,000. Assuming the SMSF has no other income from interest, no deductions, no CGT - this will mean the SMSFs taxable income will be $50,000 and in Pension mode will mean a tax bill of $0. Currently the SMSF gets to apply the $15K franking credit against its tax bill - and because it is $15K more than the SMSFs tax bill - the SMSF receives the $15K as a tax refund. Under Labours proposal the SMSF will not receive the $15K refund - the government will keep it. If the SMSF were in Accumulation mode where 15% tax is applied to income, the tax bill would be $7,500, in accumulation mode the fund is also likely to be receiving contributions, so with Contributions tax the tax bill is likely to be higher - so SMSF's in accumulation mode will be less impacted than SMSF's in Pension Mode.

Example 3 : Mary receives fully franked dividends of $35,000 (this is paid into her nominated bank account) and because it is fully franked she also receives $15,000 in franking credits. When Mary comes to do her tax, the dividends and franking credits are added together to 'gross them up' to become $50,000. This time lets assume Mary has other income of $40,000 gross per year ($5,400 withheld as tax before she is paid) from a job with no other income from interest, or no deductions - this will mean her taxable income will be $90,000 ($40,000 from her job plus the grossed up dividends) and at Marginal Rates that will mean her tax bill will be roughly$22,600. Currently she gets to apply her $15K franking credit against her tax bill, and her employer has withheld $5,400 from her job income and sent to the ato - this totals $20,400 and is $2,200 short of her tax bill. This will mean she has to pay $2,200 to meet her tax bill meaning she has fully utilised her franking credits thus there will be no refund due. So in this scenario the Labour proposal will not impact her at all.

So who does it impact:

1. Those receiving fully franked dividends of less than $98K who have less than $37K from other income sources.

2. SMSF's in pension mode, to a lesser extent SMSF's in accumulation mode.
Click to expand...
How about if Mary is an age pensioner?
 
willy1111 said:
So who does it impact:

1. Those receiving fully franked dividends of less than $98K who have less than $37K from other income sources.
Click to expand...
Thanks for that clear explanation willy. So it seams to me that those people who earn $37K or less are most affected. In other words those who earn the least are most affected, so the Labor party therefore doesn't give a stuff about people who have a low income. I won't be voting for this.
 
Bill M said:
Thanks for that clear explanation willy. So it seams to me that those people who earn $37K or less are most affected. In other words those who earn the least are most affected, so the Labor party therefore doesn't give a stuff about people who have a low income. I won't be voting for this.
Click to expand...

"More than 300,000 low-income retirees will be spared from Labor's plan to scrap cash payments for excess franking credits after the opposition amended the policy to exempt full and part-time pensioners, as well as every pensioner who is currently a recipient from a self-managed superannuation fund."

https://www.afr.com/news/labor-spares-300000-pensioners-in-33b-policy-backdown-20180325-h0xy8t
 
Kcng3150 said:
How about if Mary is an age pensioner?
Click to expand...
I don't know the exact figures but here is ball park and why most pensioners don't like it.

Mary gets 24K a year on a full government pension. She owns a 100K share portfolio that pays her a 6K a year in fully franked dividends. The imputations credits that come with that portfolio is around 2K a year. Currently she earns the 24K pension + 6K dividends + a refund of 2K of imputation credits and she earns 32K total.

Under the new scheme she loses the 2K imputation refund and only earns 30k a year. Mary loses 2K and is worse off. Not good for pensioners.
 
Kcng3150 said:
How about if Mary is an age pensioner?
Click to expand...

Bill M said:
Thanks for that clear explanation willy. So it seams to me that those people who earn $37K or less are most affected. In other words those who earn the least are most affected, so the Labor party therefore doesn't give a stuff about people who have a low income. I won't be voting for this.
Click to expand...

If not in receipt of Commonwealth pension or smsf pension prior to 19 March 2018.

It is also those in the middle who have saved hard to build a modest portfolio, choose not to receive a Commonwealth pension and would rather be self funded.

The smsf example of Mary if she were to retire today and start a pension would mean her income would be cut from $50k to $35k per year. Depending on the dividend yield, she would likely have a share portfolio between $500k-$1m...hardly rich Mr Shorten!
 
Bill M said:
I don't know the exact figures but here is ball park and why most pensioners don't like it.

Mary gets 24K a year on a full government pension. She owns a 100K share portfolio that pays her a 6K a year in fully franked dividends. The imputations credits that come with that portfolio is around 2K a year. Currently she earns the 24K pension + 6K dividends + a refund of 2K of imputation credits and she earns 32K total.

Under the new scheme she loses the 2K imputation refund and only earns 30k a year. Mary loses 2K and is worse off. Not good for pensioners.
Click to expand...

The original announcement didn't include pensioners...but after a massive backlash, Bill made a further announcement that pensioners and those in receipt of a smsf pension prior to 19 March 2018 would still be entitled to the refund.

Also I think maybe union/industry funds are unaffected?

If labour were to get in, it is likely there may be further changes to their proposal, and they still have to get it through.
 

Similar threads

bigdog
How to avoid Shorten's plan to abolish the refund of excess franking credits
3 4 5
Replies
91
Views
13K
Value Collector
Value Collector
Top