How to retire early... or simply survive

[Value Collector]

Thanks for articulating it well VC.

My question is this. What happens if my imputation credit is lower than the tax I paid?

I guess I don't get my $30 refund in cash?

So the only way to get my refund is to avoid paying tax either through not working or from having a very good accountant

To me that comes across as a message that conflicts with our need to mitigate budget deficits.

What I'd like to know is why the Howard Govt handed out these cash refunds in the first place?

You always get the benefit of the franking credit regardless of your tax bracket.

For example if you are in the top tax bracket of 45% then,

1, The full $100 ($70cash + $30 franking credit) Amount is added to your taxable income,

2, the tax office then says you owe $45 tax (45%) on these earnings.

3, you pay that $45 using ($30 franking credit) + $15 of the cash dividend you got.

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The whole point is to pass the $100 of company earnings along to the shareholder / owner, and then tax it at that individuals personal tax rate.

Sometimes that personal tax rate is higher than the 30% company tax so they have to add in extra to bring up the total, other times the persons tax rate is lower, so they will get a refund of some of the tax they have already paid.

 

[Value Collector]

In my view: It is unfair (unsustainable) that workers might be paying income tax at a rate of up to 49%, whilst others over 60 years old with significant assets (in some cases) not only pay no income/earnings/CG tax AT ALL, they actually receive a cheque from the ATO each year.

What would be unfair to me, is if someone could earn up to $18,000 tax free in the form of Wages, Bank interest, distributions from partnerships etc etc and they get to keep the whole $18,000 tax free because its below the tax free threshold.

But, if I happen to earn $18,000 inside a company structure, I have to pay $5,400 tax and am only allowed to keep $12,600 of my $18,000 earnings.

This is the whole point of franking credits.

If my share of my companies profits only amounted to $18,000 I would get a company dividend of $12,600 and a franking credit of $5,400 for the tax I paid, Which I can then use to claim back $5,400 so I end up with my full $18,000 back, just like the people who earned their $18,000 from bank interest, and didn't have to pay tax due to it being below the tax threshold.

 

[Junior]

What would be unfair to me, is if someone could earn up to $18,000 tax free in the form of Wages, Bank interest, distributions from partnerships etc etc and they get to keep the whole $18,000 tax free because its below the tax free threshold.

But, if I happen to earn $18,000 inside a company structure, I have to pay $5,400 tax and am only allowed to keep $12,600 of my $18,000 earnings.

This is the whole point of franking credits.

If my share of my companies profits only amounted to $18,000 I would get a company dividend of $12,600 and a franking credit of $5,400 for the tax I paid, Which I can then use to claim back $5,400 so I end up with my full $18,000 back, just like the people who earned their $18,000 from bank interest, and didn't have to pay tax due to it being below the tax threshold.

I understand very well how franking credits work.

I see your two examples as different categories of income. Wages represent income from personal exertion and are taxed according to personal tax rates. Dividends represent passive income to a shareholder, and are a distribution of company profits and should be taxed at least at the company tax rate.

I think society in general would like large corporations in particular, to pay tax on their profits. Not to pay the tax and have the whole amount paid back out to the individual shareholder.

 

[Value Collector]

I understand very well how franking credits work.

I see your two examples as different categories of income. Wages represent income from personal exertion and are taxed according to personal tax rates. Dividends represent passive income to a shareholder, and are a distribution of company profits and should be taxed at least at the company tax rate.

What about Bank Interest?

I don't see a difference between a person surviving on interest from a term deposit and a person with a few Woolworths shares.

I mean if you are prepared to let a depositor keep $18,000 of interest tax free, why not allow a shareholder to keep $18,000 of their company profits tax free?

I think society in general would like large corporations in particular, to pay tax on their profits. Not to pay the tax and have the whole amount paid back out to the individual shareholder.

Companies are just conduits through which shareholders can group together to invest in assets.

It makes perfect sense to me that the profits of those companies when they flow back through to the investors should be taxed at each investors personal tax rate.

Some share holders are small some are large, each should pay tax based on their personal situation.

How do you want dividends taxed?
Do you think both the company tax, and the investors personal tax rate should be applied?

If so that means that company profits will be being taxed twice, once at the corporate level then again on the personal tax return.

 

[HelloU]

OT - Comment on tax free thresholds......for old peeps not on government pension the tax free threshold is about $32000 (this does NOT include any drawdowns from super accounts or earnings inside super). SAPTO.

If you work for a charity your tax free threshold is about $36000. ( $18000 odd of your wage can be put into a credit card that is then tax free cos nil FBT paid by charities.......they get this as well as the normal $18000 tax free threshold)

So even the simple things are not simple.

 

[SirRumpole]

If so that means that company profits will be being taxed twice, once at the corporate level then again on the personal tax return.

So what ?

 

[Junior]

I mean if you are prepared to let a depositor keep $18,000 of interest tax free, why not allow a shareholder to keep $18,000 of their company profits tax free?


How do you want dividends taxed?
Do you think both the company tax, and the investors personal tax rate should be applied?

I'm not opposed to the current system of passing through imputation credits to avoid ''double taxation''. I think it's excessive where it results in a tax refund to an individual, who doesn't actually pay any earnings tax or income tax in the first place.

As the population ages, and more and more of us are holding shares in a zero tax environment, the value of company tax being paid back out as refunds to individuals & SMSFs will continue to grow, to unsustainable levels in my view.

 

[Value Collector]

So what ?

Then it means that people whose businesses are organised as companies pay a lot more tax than people who are under other structures, eg sole operator or partnership, or earn interest from term deposits etc which isn't fair.

 

[Value Collector]

I'm not opposed to the current system of passing through imputation credits to avoid ''double taxation''. I think it's excessive where it results in a tax refund to an individual, who doesn't actually pay any earnings tax or income tax in the first place.

.

So you are just against the tax free threshold in general?

because giving an investor a $5400 refund of the franking credit on their $18,000 of company earnings, is no different to allowing a depositor to keep $18,000 of interest tax free.

eg. $18,000 tax free interest is exactly the same as $12,600 cash dividend + $5400 refund of franking credits.

Both options are simply allowing the person to receive their first $18,000 of earnings tax free.

 

[Junior]

So you are just against the tax free threshold in general?

Absolutely not!!!

I don't think anyone here has proposed to completely remove the imputation credit system. The discussion is around the situation where an individual (usually retired or not working) or SMSF receives a tax refund of excess franking credits.

Where someone receives $18,000 of interest or dividends, neither one of those individuals would pay any income tax, which is as it should be. The discussion is around whether the shareholder should receive a tax refund of franking credits for tax already paid by the company, at company rates.

As Sir Rumple pointed out, it's all in the semantics. You see it as though company tax is one and the same as personal tax...but it's not. They are a different set of tax rates. Companies pay a flat rate and individuals pay based on thresholds.

 

[Value Collector]

Where someone receives $18,000 of interest or dividends, neither one of those individuals would pay any income tax, which is as it should be. The discussion is around whether the shareholder should receive a tax refund of franking credits for tax already paid by the company, at company rates.

You just don't understand how the calculation is done, that may be why you are against it.

When you receive a $12,600 fully franked dividend it comes with a $5,400 franking credit,

$12,600 + $5400 franking = $18,000.

The Full $18,000 is added to your tax return as taxable income.

Then because the total amount of your earnings is only $18,000, the tax office declares that you don't need to pay any tax, So they hand you back the $5,400 they had already deducted from you.

you then have the $12,600 cash from dividend, + the $5,400 refund from the franking credit which together = $18,000

So you end up in exactly the same situation as a person who earned $18,000 interest and didn't get charged tax, you aren't getting anything extra, you are only getting your tax free threshold allotment just like anyone else

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If you don't want people to be able to claim back a refund for their franking credits, you are basically saying that $18,000 earned inside a company is some how different to $18,000 earned as bank interest, business partnership, wage etc.

 

[macca]

Hi VC,
I admire your persistence, it is obvious that you are the only one in this discussion that actually knows what they are talking about.

The bottom line is that income from all sources for the tax year is pooled, the total tax payable is calculated, the total tax already paid by the tax payer, whether it is paye, provisional tax or dividend franking is totalled.

The tax payer is then either given a refund or sent a bill, simple really.

 

[Value Collector]

The bottom line is that income from all sources for the tax year is pooled, the total tax payable is calculated, the total tax already paid by the tax payer, whether it is paye, provisional tax or dividend franking is totalled.

The tax payer is then either given a refund or sent a bill, simple really.

Exactly, Most armchair observers fail to see that when you receive $70 in your bank from a fully franked dividend, they don't add $70 to your taxable income at the end of the year, they add the full $100 ($70 + $30 franking credit) to your taxable income.

of course when it comes time to pay that tax owing they deduct the franking credit you have already paid, which for low income earners may result in a refund, for higher income earners the franking credit only partially offsets the tax liability owing.

As I have said, its just about putting the $100 onto the investors tax return and paying what ever rate that person is at.

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Also, this is only for earnings paid out as dividends, the government will keep the full 30% company rate for any earning that are retained and not paid as dividends,

 

[SirRumpole]

Then it means that people whose businesses are organised as companies pay a lot more tax than people who are under other structures, eg sole operator or partnership, or earn interest from term deposits etc which isn't fair.

Do you really think that someone getting tax free super of say $100k per year (no dependents) should get a refund on franking credits when someone working, trying to raise a family and earning $100k would pay $24k in tax is fair ?

 

[Wysiwyg]

The thing with the fairness bit is it was okay and not unfair up until now when Labor claims it is now unfair. That is unfair.

 

[Value Collector]

Do you really think that someone getting tax free super of say $100k per year (no dependents) should get a refund on franking credits when someone working, trying to raise a family and earning $100k would pay $24k in tax is fair ?

The question isn't whether they should get their franking credits, the question is whether they should qualify for the $18,000 tax free threshold and lower tax brackets at all.

If you are allowing people to keep the $18,000 tax free threshold for other sources such as bank interest, there is no reason not to allow a refund for franked dividends.

eg. if you are ok with some one keeping $18,000 of bank interest tax free, you shouldn't have a problem with a person that received a franked $12,600 dividend getting the $5400 tax the paid back.

Both of them end up with $18,000 of earnings tax free.

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I am not an expert on super, but Super is taxed isn't it? (albeit at low rates), They probably were taxed on the money they contributed when they made contributions, and have been taxed on the supers earnings over the years.

Not all of that "$100K per year" is earnings, a chunk of it is generally principle, if they are simply withdrawing principle why would they be taxed? you don't get charged tax to withdraw money from a bank account, you only get taxed on the earnings.

 

[Value Collector]

The thing with the fairness bit is it was okay and not unfair up until now when Labor claims it is now unfair. That is unfair.

I just think they don't understand the system, or they see it as easier to demonise "share holders" earning dividends, rather than "depositors" earning interest.

but as I explained both situations are identical.

 

[SirRumpole]

eg. if you are ok with some one keeping $18,000 of bank interest tax free, you shouldn't have a problem with a person that received a franked $12,600 dividend getting the $5400 tax the paid back.

Someone earning $18,000 in bank interest as their only income qualifies as a low income earner and pays no tax because they earn very little money.

That's a lot different to someone earning $100k and paying no tax.

 

[Junior]

You just don't understand how the calculation is done, that may be why you are against it.

When you receive a $12,600 fully franked dividend it comes with a $5,400 franking credit,

$12,600 + $5400 franking = $18,000.

The Full $18,000 is added to your tax return as taxable income.

Then because the total amount of your earnings is only $18,000, the tax office declares that you don't need to pay any tax, So they hand you back the $5,400 they had already deducted from you.

you then have the $12,600 cash from dividend, + the $5,400 refund from the franking credit which together = $18,000

So you end up in exactly the same situation as a person who earned $18,000 interest and didn't get charged tax, you aren't getting anything extra, you are only getting your tax free threshold allotment just like anyone else

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If you don't want people to be able to claim back a refund for their franking credits, you are basically saying that $18,000 earned inside a company is some how different to $18,000 earned as bank interest, business partnership, wage etc.

I know the calculation very well, thanks VC. And yes, that would be the situation for an individual if all they had was either dividend income OR interest income, at that exact level you have quoted. The reality is that the majority of shareholders would also have some interest income or other income as well, and the imputation credits would still be of value, as they would still count as 'tax paid' and therefore allow the individual to generate income over and above the $18,000 before they would need to pay any income tax on top of tax the company has already paid.

To answer your last question, Yes, I think that those two types of income are different, as the dividend represents a portion of company profits, and should be taxed at the company rate of 30% (hopefully lower in future).

Interest income is interest paid to you by the bank, on the balance of your cash savings.....nothing to do with company profits, it is income generated by a different type of asset. It is taxed at MTR of the individual, or whichever entity earns the interest.

 

[Junior]

The confusion is where you originally stated someone receives a dividend of $18,000.....well they haven't received $18k. They have received $12,600.

The $5,400 is an imputation credit which they won't necessarily receive, in terms of a cash payment.....this is what we are discussing!