Budget 2014

[craft]

Yer. The PPL levy paid by the top 3,000 companies will also not have franking credits attached because it's a "levy".

Largely under the radar but the devil is always in the detail.

A retiree living on 100K of grossed up dividends would currently have a net income of $73,553 that will reduce by $1,290 directly as a result of the PPL being funded by a ‘levy’ and the implication on franking credits.

edit:
The above is for outside the super system

For inside super (over 60 and receiving tax free status) the current net figure is 100K reducing by $2,097.

 

[craft]

And for super funds in accumulation mode a 100K of current grossed up dividend income is reduced by a net $1,783 over the pre PPL levy situation.

 

[Julia]

On the six month stand down period for young people, is that only if they do not engage in any 'learning program'?
eg the government says young people should be 'earning or learning'.

If they receive youth allowance or newstart while learning something useful then that's reasonable enough.

Kate Carnell suggested one means of improving the situation for employment of young people would be to abolish or moderate penalty rates. She believes there would be many more jobs at weekends etc if businesses were not obliged to pay such high rates. Sounds sensible, doesn't it?

There are kids out there from multi generational welfare families who have no concept of actually working for a living. I spent about 12 years volunteering with a community agency doing emergency relief applications.
Just an astonishing number of young people turned up with bare, dirty feet and clothes, a face full of metal, and tatts everywhere. When asked how their search for work was going, there was just a blank face.

 

[Garpal Gumnut]

I'm probably down about $8000 pa over next 3 years on this budget.

Money well spent.

gg

 

[trainspotter]

There are kids out there from multi generational welfare families who have no concept of actually working for a living. I spent about 12 years volunteering with a community agency doing emergency relief applications.
Just an astonishing number of young people turned up with bare, dirty feet and clothes, a face full of metal, and tatts everywhere. When asked how their search for work was going, there was just a blank face.

And they wonder why they can't get work? Cracks me up they can afford $500 for a tattoo and some piercings but not enough for a decent set of clothes for a job interview.

 

[Junior]

Largely under the radar but the devil is always in the detail.

A retiree living on 100K of grossed up dividends would currently have a net income of $73,553 that will reduce by $1,290 directly as a result of the PPL being funded by a ‘levy’ and the implication on franking credits.

edit:
The above is for outside the super system

For inside super (over 60 and receiving tax free status) the current net figure is 100K reducing by $2,097.

Also...if the company has to be less tax, there should be higher profits to distribute to shareholders = higher dividend payments.

 

[waimate01]

Also...if the company has to be less tax, there should be higher profits to distribute to shareholders = higher dividend payments.

Dividend payment is grossed-up and marginal tax paid in the hands of the recipient. For an Australian-resident taxpayer, this means net-net the reduced company tax rate has no benefit.

The benefit lies in the area of retained earnings reinvested in items of a capital (ie, depreciable, not deductable) nature, because the company sees less erosion in its retained earnings.

It's effect is to encourage companies to reinvest profits, not to increase spendable cash in the hands of domestic shareholders.

 

[Smurf1976]

On the six month stand down period for young people, is that only if they do not engage in any 'learning program'?
eg the government says young people should be 'earning or learning'.

Listening to the budget last night, it sounded very much like wait 6 months (zero income) and then you will qualify for the dole if you work for it (work for the dole). That is, an outright no dole for 6 months policy. That's how I interpreted what was said.

My own view is that such a policy is unnecessarily harsh, will have unfortunate consequences, and it's simply un-Australian to not be assisting those in genuine need for whatever reason. Six months is too long, six weeks maybe OK but not six months. And why the age 30 bit? If it's such a good idea then why not apply it to everyone?

I don't dispute the need to fix the budget, but this sounds very much like a case of using the budget situation as a convenient excuse to implement policies on purely ideological grounds whether or not there's a financial imperative to to so. I mean seriously, we're saying no help to people in need for 6 months. Surely there's got to be another way to find some savings.

 

[DeepState]

...Dividend payment is grossed-up and marginal tax paid in the hands of the recipient. For an Australian-resident taxpayer, this means net-net the reduced company tax rate has no benefit.

Not quite accurate.

From KPMG:



Cheers

 

[Ves]

The benefit lies in the area of retained earnings reinvested in items of a capital (ie, depreciable, not deductable) nature, because the company sees less erosion in its retained earnings.

It's effect is to encourage companies to reinvest profits, not to increase spendable cash in the hands of domestic shareholders.

You're missing the impact of the PPL Levy.

Company currently pays tax at 30%.

After changes tax rate is 28.5%, but the largest 3000 companies pay a 1.5% PPL levy.

The whole point is that the 1.5% levy is a levy and not a tax, so no franking credits are generated on it.

Cash flow for taxes and levies is exactly the same in the company's hands. There is no extra cash to reinvest.

 

[pixel]

Not quite accurate.

From KPMG:

View attachment 57954

Cheers

If you compare the paid-out dividend, your contradiction has merits. But you'll have to compare apples and apples, which is the company's after-tax profit that's paid out as dividend.
If a company's before-tax profit is $100, under 30% tax, it can pay out 70c. Grossed-up by the Franking Credit, the investor gets $100, of which $30 has been paid in tax.
After the reduction to 28.5%, the $100 before-tax profit become $71.50 dividend, grossed-up to $100 with $28.50 tax paid.
In both cases, you pay your own marginal tax rate on those $100; whether you receive a credit of $30 now or $28.50 later won't make a penny difference because you have to add the $1.50 additional dividend you received when the dividend was paid out.

PS Ves: The PPL Levy has probably less impact than Labor's Super Profits Tax.

 

[waimate01]

Not quite accurate.

From KPMG:

View attachment 57954

Cheers

KMPG miss the point that with a lower tax rate, the amount of proceeds available for distribution via dividends is higher, thus the "100" at the top of each column is an assumption which is not necessarily correct.

 

[waimate01]

You're missing the impact of the PPL Levy.

Agreed - ignoring the effects of the PPL. My comment applied to the non-benefit to shareholders of lower company tax rates.

 

[Ves]

In addition to my previous post - a source for my comments.

The Government confirmed that it was committed to cutting the company tax rate by 1.5 percentage points (to 28.5%) from 1 July 2015. For large companies, the reduction will offset the cost of the Government’s 1.5% Paid Parental Leave levy.

http://sites.thomsonreuters.com.au/...t-70-welfare-means-testing-other-tax-changes/

Found under "Revenue measures"

Pixel, can you provide a source that says differently, ie. what makes you think large ASX listed companies will not have to pay the 1.5% PPL scheme levy (and therefore be able to retain the cash)?

 

[McLovin]

If you compare the paid-out dividend, your contradiction has merits. But you'll have to compare apples and apples, which is the company's after-tax profit that's paid out as dividend.
If a company's before-tax profit is $100, under 30% tax, it can pay out 70c. Grossed-up by the Franking Credit, the investor gets $100, of which $30 has been paid in tax.
After the reduction to 28.5%, the $100 before-tax profit become $71.50 dividend, grossed-up to $100 with $28.50 tax paid.
In both cases, you pay your own marginal tax rate on those $100; whether you receive a credit of $30 now or $28.50 later won't make a penny difference because you have to add the $1.50 additional dividend you received when the dividend was paid out.

That's not correct. The dividend will remain $70 but the denominator will be 0.715 instead of 0.7. There are no franking credits attached to the additional 1.5% levy.

So in your example, the grossed up dividend will be $70/0.715= $97.90 ( the .715 represents franking credits available not tax paid by the company)

Applying at 15% tax rate...

Current system:

Grossed up div: $100

Tax @15% $15

Franking credits $30

Refund $15

New System:

Grossed up dividend: $97.90

Tax @15% $14.685

Franking credits: $27.90

Refund $13.215

 

[DeepState]

On the six month stand down period for young people, is that only if they do not engage in any 'learning program'?
eg the government says young people should be 'earning or learning'.

If they receive youth allowance or newstart while learning something useful then that's reasonable enough.

Newstart Age ($510 per fortnight) lifted to 25. Waiting period is six months. Only payable for six months. Newstart payments are 1mth for every year worked prior to application.

Youth Allowance ($414 per fortnight) also has six month wait period. Payable for six months.

Exceptions apply to the waiting period to single parents, apprentices, disabled...

To qualify, in the period before they receive income support, they will be required to attend gov't job seeking programs. Refusing work will result in loss of benefit or penalties.

During Newstart or Youth Allowance, they will eventually need to work 25hrs per week as per work for the dole.

If still unemployed after 12 months, then they move to work for the dole. Hours of work will rise to 25hr per week from 1 July 2015 (from 15hrs currently).

....it's a squeeze from all angles (age, time wait, hours worked for benefit, reduction in length of benefit payment to a max of six months - less if you are on Newstart and have not worked six years, freeze on indexation). I read it as no income for the first six months unless in particularly extenuating circumstances.

Cheers

 

[DeepState]

KMPG miss the point that with a lower tax rate, the amount of proceeds available for distribution via dividends is higher, thus the "100" at the top of each column is an assumption which is not necessarily correct.

And from Pixel too.

The KPMG illustration is obviously to demonstrate the change in the tax rates and thus franking on the calculation of tax payable on a (hundred) dollar of cash dividend. What you both say is correct (in terms of cash payment), but it also involves the assumption that dividend payments as a percentage of profit will not change...ie full payout.

Let's explore:

By reducing the corporate tax rate, at least for smaller businesses, all things equal and as Waimate pointed out him/her/yourself, it encourages retention of earnings as the cost of equity capital has come down at the margin. This is an implicit intent of reducing the corporate tax rate because this stuff creates growth and employment more effectively than returning dividends which are generally applied to direct consumption or saving if returned ultimately to a direct holder. If not distributed but retained in a major super fund or something, not much changes as the distribution is reinvested. Even for large companies where the mix of tax type between a levy and a tax has changed, dividends are also less valuable (to domestic investors) with a lower attaching franking credit. At the margin this will reduce the attractiveness of paying a dividend relative to retaining earnings where projects and initiatives become more viable in a relative sense for every dollar of distributable profit that emerges. These effects will lower the payout ratios from whatever they are now - all else equal.

Personally, I have no idea what that payout ratio will become. But it will generally be expected to lower, with all else being equal, relative to the current situation. That is what would be expected with these changes and it is part of a process of deepening capital investment. Further, it is interesting that the corporate tax rate in Aust is higher than elsewhere in general and so is our yield. I think that, maybe, part of the difference arises because of a lack of a dividend imputation system (whose benefits are now weaker for Aust) and a lower tax rate which encourages capital retention.

Cheers

 

[sydboy007]

http://www.businessspectator.com.au/article/2014/5/13/politics/another-budget-bounty-lucky-party

basically for the budget to meet it's forecasts we're looking at private debt grow of a tad over 6% each year (less than half the Howard years)

But the second thing to say is that this required rate of growth of private debt sits on top of a much bigger private debt pyramid than the Howard years commenced with. When John Winston Howard came to power, private sector debt in Australia (the sum of household plus business debt) was roughly 85 per cent of GDP. When Tony Abbott took over, it was roughly 145 per cent of GDP.

So for private debt to grow at 7 per cent of GDP per year when it is currently about 1.4 times GDP means an annual growth rate of private debt of about 10 per cent per year (correct level is something like 6.2%-9.5%)-- 5 per cent faster than the expected rate of growth of nominal GDP (correct level is up to 4.5%).

So for Joe Hockey’s budget books to balance, how high would Australian private sector debt need to be by 2025? On the back of the envelope calculations here, it would need to be about 250 per cent of GDP

 

[DeepState]

http://www.businessspectator.com.au/article/2014/5/13/politics/another-budget-bounty-lucky-party

basically for the budget to meet it's forecasts we're looking at private debt grow of a tad over 6% each year (less than half the Howard years)

But the second thing to say is that this required rate of growth of private debt sits on top of a much bigger private debt pyramid than the Howard years commenced with. When John Winston Howard came to power, private sector debt in Australia (the sum of household plus business debt) was roughly 85 per cent of GDP. When Tony Abbott took over, it was roughly 145 per cent of GDP.

So for private debt to grow at 7 per cent of GDP per year when it is currently about 1.4 times GDP means an annual growth rate of private debt of about 10 per cent per year (correct level is something like 6.2%-9.5%)-- 5 per cent faster than the expected rate of growth of nominal GDP (correct level is up to 4.5%).

So for Joe Hockey’s budget books to balance, how high would Australian private sector debt need to be by 2025? On the back of the envelope calculations here, it would need to be about 250 per cent of GDP

Relax! Steve Keen is no monetary economist and seems to have messed up his maths, let alone making a travisty of the money multiplier...

 

[CanOz]

.... back of the envelope calculations here, it would need to be about 250 per cent of GDP[/I]

... you know where that got ya!