How to retire early... or simply survive

[Sir Burr]

the process works like this.

1, Company earns $18,000 in share holder profits.

2, Company pays $5,200 in tax

3, Company pays $12,600 as dividend with $5,400 franking credit = $18,000

4, Investor declares $18,000 income on tax return.

5, tax office says no tax is payable on the $18,000

6, Tax office hands back the $5,200 franking credits

7, Investor now has $18,000 to spend, just as if they earned $18,000 in bank interest.

How about:
3, Company pays $18,000 as dividend with $0 franking credit = $18,000

 

[Junior]

That paragraph makes we think you don't really understand the process?

I understand the process very well. You are ridiculing me to strengthen your point of view.

You've decided all income is the same and all income should be taxed at an individual's marginal tax rate. It is not that simple in reality, and you are ignoring this fact to support your personal view.

- Corporate profits are taxed at 30%
- Individual tax rates operate in tax brackets, plus medicare levy, less tax offsets in some instances
- Super in accumulation is taxed at 15%
- Super in pension phase, taxed at 0%
- Trust income; distributed to beneficiaries and taxed based on the individual or entities tax rate

My point is, your persistent argument that all income is the same and is all taxed at a personal level is simply not based on how our tax system works. It's more complicated than that, as you know.

As it stands, yes, all imputation credits pass through to the individual or shareholding entity, and where that entity is on a marginal rate below 30% they are refunded the tax already paid. This is unique to Australia and is not generally how company tax is treated in the majority of jurisdictions.

 

[moXJO]

. This is unique to Australia and is not generally how company tax is treated in the majority of jurisdictions.

Other jurisdictions have vastly differing taxes and incentives.

 

[Bill M]

Other jurisdictions have vastly differing taxes and incentives.

Exactly, like New Zealand for example. It doesn't matter how much assets you have accumulated in your lifetime, the NZ Govt. will still pay you a pension at retirement.

 

[Value Hunter]

Scumbag politicians talking about fairness is the height of hypocrisy. They gouge the public purse for extravagant pensions for only a very brief period of service https://www.smh.com.au/politics/fed...figure-pensions-for-life-20160304-gna6c1.html while meanwhile they want to clamp down on franking credit refunds to self funded retirees who typically have a fraction of the income their fat cat political pension provides. If they want to plug the deficit why don't they set an example and start with their own fat cat public pensions which are costing taxpayers tens of millions.

Besides measures like this never raise the forecast tax revenue numbers they expect because they never accurately model the markets counter-reactions. Its not like people and companies will sit there and take it lying down. If the proposed labour changes are implemented a combination of things could happen including:
-An increase in share buybacks and capital returns by companies
-Bringing forward dividend payments by paying large special one off dividends before the implementation date of such changes.
-A lowering of dividend payout ratios in favour of reinvesting more profits for growth.
-Investors shifting their investment allocations and weighting more towards other asset classes such as property (pushes up house prices further), international shares (capital that could be going to Aussie companies), debt securities, etc.

Labour's proposal is one of the dumbest and most short sighted ideas I have seen for a while.

 

[McLovin]

As it stands, yes, all imputation credits pass through to the individual or shareholding entity, and where that entity is on a marginal rate below 30% they are refunded the tax already paid. This is unique to Australia and is not generally how company tax is treated in the majority of jurisdictions.

Bingo. The purpose of franking credits was to ensure that shareholders were not taxed twice, not to make it possible for companies to pay no tax on a portion of their profits, which the current system in effect does.

 

[Value Hunter]

Income taxes (especially corporate income taxes) are an economically distortive, difficult to define and easy to cheat and generally idiotic taxes to begin with. To the extent that we should even have taxes (a debate for another day) they should be focused on consumption (put up the GST), financial transactions (every bank transfer or credit card payment for example could have a 0.25% levy that goes to the government), the unimproved value of land, etc.

Besides McLovin if you push self funded retirees into poverty by taxing them more, guess who they are going to go to for a handout? That's right, they will be lining up at centrelink (a.k.a. asking the taxpayers for a handout), as for rich people no longer getting the franking credit refunds, they will just shift their investment mix away from australian dividend paying shares into other investments. Do you really think its going to provide much revenue to government coffers? It reminds me about Kevin Rudd's projections about the mining super profits tax. After it got watered down to the MRRT how much did actually raise? The answer is peanuts.

 

[SirRumpole]

they will just shift their investment mix away from australian dividend paying shares into other investments.

For every seller of Aus shares there must be a buyer. Zero sum game. A chance for others to get good value.

 

[willy1111]

Thinking about the whole concept a bit further.

The most affected would be those with an SMSF in pension mode. Say $1m in shares so don't qualify for any gov pension, receiving say 4% full franked dividends, so about $40k which would come with about $17k of franking credits which currently get refunded but won't under Billys proposal.

It is one train of thought that the SMSF could sell down $17k worth of shares at tax time to replace the loss from the franking credit refund. Assuming no capital growth this would take about 58 yrs to deplete the capital, which would be beyond the life expectancy.

With long term capital growth rates about 4-5%, 1.7% could be sold down each year and the capital and dividends would still continue to grow each year.

Not popular but just an alternate view.

 

[Smurf1976]

Thinking about all this from the perspective of what to invest in, it would seem to be a definite negative for Australian shares which provide a large portion of returns via franked dividends. They become a less attractive investment.

It might increase demand for growth stocks although that seems less certain given the alternatives of real estate or international markets.

So whilst I’m not running a SMSF and my marginal tax rate is am more than the company tax rate there’s still an effect in that I’d be wise to avoid Aussie dividend paying stocks due to political risk.

In a broader sense I see the negatives but it might turn out well if (and that’s a big “if”) it leads to a greater focus on growth rather than dividends in terms of how companies go about their real business.

 

[Value Hunter]

SirRumple for every seller there must be a buyer yes, but those buyers might be in a different tax situation, they could be overseas investors, or they could be investors on high income tax rates who are not affected by the proposed legislation, etc therefore my point stands that the government may not raise the tax revenue they expect.

Also its only a zero sum game when referring to the secondary market, if we are looking at the market for raising capital (i.e. IPOs and rights issues) this proposed change could lead to a decline in the total amount of capital being raised in the stock market via rights issues, share placements and IPOs.

 

[SirRumpole]

SirRumple for every seller there must be a buyer yes, but those buyers might be in a different tax situation, they could be overseas investors, or they could be investors on high income tax rates who are not affected by the proposed legislation, etc therefore my point stands that the government may not raise the tax revenue they expect.

Also its only a zero sum game when referring to the secondary market, if we are looking at the market for raising capital (i.e. IPOs and rights issues) this proposed change could lead to a decline in the total amount of capital being raised in the stock market via rights issues, share placements and IPOs.

You may be right but it seems a small issue that people will adjust to over time.

 

[Bill M]

With long term capital growth rates about 4-5%, 1.7% could be sold down each year and the capital and dividends would still continue to grow each year.

Sounds good but this is not happening. The All Ords is where it was 11 years ago, has not moved for so long. A passive investment in that option means you are depleting capital very fast rate. Aussie shares under the Labor proposal will plummet because who in their right mind would take on such a high risk with a new much lower return? No Thanks.

 

[willy1111]

Sounds good but this is not happening. The All Ords is where it was 11 years ago, has not moved for so long. A passive investment in that option means you are depleting capital very fast rate. Aussie shares under the Labor proposal will plummet because who in their right mind would take on such a high risk with a new much lower return? No Thanks.

Oh Bill, but when you run out of capital then you can get the aged pension

Its a scary proposition eating into the capital, its like giving up part of your security blanket especially with the unguaranteed returns shares offer...but they suggest the capital is meant to be consumed during retirement, not passed on as part of ones estate.

 

[McLovin]

Income taxes (especially corporate income taxes) are an economically distortive, difficult to define and easy to cheat and generally idiotic taxes to begin with. To the extent that we should even have taxes (a debate for another day) they should be focused on consumption (put up the GST), financial transactions (every bank transfer or credit card payment for example could have a 0.25% levy that goes to the government), the unimproved value of land, etc.

Besides McLovin if you push self funded retirees into poverty by taxing them more, guess who they are going to go to for a handout? That's right, they will be lining up at centrelink (a.k.a. asking the taxpayers for a handout), as for rich people no longer getting the franking credit refunds, they will just shift their investment mix away from australian dividend paying shares into other investments. Do you really think its going to provide much revenue to government coffers? It reminds me about Kevin Rudd's projections about the mining super profits tax. After it got watered down to the MRRT how much did actually raise? The answer is peanuts.

...And companies shouldn't pay tax because...

 

[Value Hunter]

Actually McLovin I am not only opposed to company tax I am opposed to all income taxes. I think profits, wages, etc should not be taxed. Why tax productivity? If you tax something you tend to get less of it, tax income and you will get less of it being generated.

Assuming for a minute that any form of tax should exist in the first place (we will leave aside the anarachy debate for now), if you increase land taxes (put up the land tax on the unimproved value of land) you will get less property speculation and if you increase consumption taxes (e.g. put up the GST to 20%) people might consume less. If people consume less they will save more, higher savings in the long term leads to higher production and higher growth and then flowing from that higher consumption.

Why punish people for being industrious and generating more income?

 

[SirRumpole]

and if you increase consumption taxes (e.g. put up the GST to 20%) people might consume less.

Oh yes, that will be great for business won't it ?

 

[Value Hunter]

SirRumpole you ignored the part where I said income taxes and corporate taxes should be scrapped so most people and businesses would still have more money to spend despite higher GST.

 

[willy1111]

...And companies shouldn't pay tax because...

A company is an ownership structure.

They are owned by shareholders, so should only be taxed at the tax rate of the share owner when passed through to the shareholder when a dividend is paid.

Companies are taxed at the company tax rate to prevent the owners hoarding money in the company without paying tax. Otherwise owners could just compound earnings tax free indefinitely. The penalty for not distributing all the profit is the company tax rate...aka 30% ish or slightly less for small business, this puts revenue in the government coffers now which is what the government want.

Trusts are taxed at the highest marginal rate if all the profit isn't distibuted, so it pretty much always is distributed and taxed in the hands of the beneficiaries, for an individual beneficiary they get the marginal rate and tax free portion is a benefit. If one has to pay PAYG instalments through out the year, this is refunded if the instalments exceed the tax obligation.

A business run as a sole trader or partnership, the profit is taxed at the marginal rate of the owner of the business who can take advantage of the tax free portion. If one has to pay PAYG instalments through out the year, this is refunded if the instalments exceed the tax obligation.

Employees who have tax witheld from their income through out the year are entitled to a tax refund if they have had more witheld than their obligation.

If Bills proposal comes in, the company structure looks to me to be disadvatageous from a tax perspective as opposed to the other structures, as the owner isn't refunded the excess tax witheld if their tax obligation is less, ie they get no benefit from the tax free portion or lower marginal rates.

 

[Toyota Lexcen]

noel whittaker has a good write up in age on 3 scenarios

full pension looking good