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Please explain franked dividends to me


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#1 Literary Lemur

Posted 16 May 2019 - 03:38 PM

I'm trying to get my head around the proposed changes to franked dividends. Under the current arrangement is it true that a major shareholder of a large company could elect to pay themselves no salary and instead live off franked dividends and they would receive a cash refund equal to the tax already paid by the company? Current tax rate of 30%? So even if those dividends amounted to hundreds of thousands of dollars they would pay zero tax? Or have I misunderstood?



So their tax return would look like:



Salary - zero


Tax paid - zero


Franked dividends - $1mil - $300K paid in campany tax/franked

Tax refund $300K cash.

Are these the steps that are taken so large companies effectively pay no tax? ie in the above example the company has paid the tax but its then handed back tot he shareholder who may be one of the directors of the company.

And when labor initially applied this across the board pensioners were the unintended victims (and they are now excluded) when it was aimed at the top end of town?


ETA to change shares to dividends


Edited by Literary Lemur, 16 May 2019 - 03:58 PM.


#2 molinero

Posted 16 May 2019 - 03:48 PM

Ask Kerri Anne Kennerly to explain it. Apparently she is an expert.

Or not.

She makes me so stabby.

The way you explained it sounds like the way I understand it.
It's a strategic tax avoidance loophole that we can live without.

#3 SplashingRainbows

Posted 16 May 2019 - 03:52 PM

No not at all.

The dividend is included in income. As are the franking credits. The value of the shares has nothing to do with it.

Let’s say the dividend is $70,000 cash. And the franking credits are $30,000. Income included in tax is $100,000.

Actual tax on $100k is calculated. This is $26,497 inc Medicare for 2019 (no HECS).  

The franking credits are then used to offset that tax.

Under the current law a refund of $3,503 would be payable.

Under the labor proposal no refund would be payable.

All dividend income is taxed. Franking credits are taxed even though they are not received in cash. Franking credits reduce the tax bill and are refundable so if the tax bill is less than the FC you get a refund. If the tax bill is more than the FC you pay the difference.

Edited by SplashingRainbows, 16 May 2019 - 03:56 PM.


#4 Literary Lemur

Posted 16 May 2019 - 03:56 PM

ah okay


Yeah I stuffed up the value of shares.

It should have said value of dividends. I've amended it. Is it now correct?

#5 SplashingRainbows

Posted 16 May 2019 - 03:59 PM

A million dollar dividend would not have a $300k franking credit unless some was unfranked or $1m is the gross amount.

Let’s say $1m is gross income. $700k is received by the taxpayer in cash. $300k goes to the government in tax.

The taxpayer puts the whole $1m in their tax return.
They pay $443,097 tax inc Medicare levy. Assumed no surcharge and no HECS.
They get a credit for the $300k tax paid and have to pay to the government $143,097.

#6 Daffy2016

Posted 16 May 2019 - 04:02 PM

The Conversation has a good explainer: https://www.google.c...iree-tax-111423

#7 Literary Lemur

Posted 16 May 2019 - 04:05 PM

Thanks. Okay so the shares do count as part of normal income and dividend are discounted off tax paid / payable under the normal tax rates?

I thought fully franked were at 30%?

#8 SplashingRainbows

Posted 16 May 2019 - 04:05 PM

It’s not surprising your confused. Bowen is too. He’s had to be corrected a number of times.

https://www.nestegg....gures-explained

#9 MarigoldMadge

Posted 16 May 2019 - 04:06 PM

$6b a year and growing, 80% of franking credits to those of retirement age go to the wealthiest 20% of household, with over 50% of the cash refunds going to self managed super funds with balances in excess of $2.4M.

It has to go.

#10 SplashingRainbows

Posted 16 May 2019 - 04:12 PM

View PostLiterary Lemur, on 16 May 2019 - 04:05 PM, said:

Thanks. Okay so the shares do count as part of normal income and dividend are discounted off tax paid / payable under the normal tax rates?

I thought fully franked were at 30%?

Small business pays tax at 27.5% so their FF rate is 27.5%
Assuming bigger business yes it’s 30%. What you’re missing is that tax is paid in cash to the ATO. And it’s gone. If a company makes $1.000,000 profit it only has $700k left to pay as a dividend.

The $700k dividend can be fully franked with $300k franking credits assuming the company has sufficient balances in its franking account.

The taxpayer gets taxed on the $1m even though they only receive the $700k. The difference is the franking credit.

If the franking credits is less than the actual tax payable this means the taxpayer has to top up. If more they get a refund.

This is to stop double taxation.

If a company declares a dividend of $1m with $300k FC the taxable income is $1.3m and part of the dividend is unfranked.

#11 Literary Lemur

Posted 16 May 2019 - 04:12 PM

View PostDaffy2016, on 16 May 2019 - 04:02 PM, said:

The Conversation has a good explainer: https://www.google.c...iree-tax-111423

That was really helpful. Thank you.

I can see that it would be problematic for those in the grey area - too much to have a pension but really relying on the tax refund on franked shares tax refunds to have a sufficient income.

#12 Literary Lemur

Posted 16 May 2019 - 04:15 PM

View PostSplashingRainbows, on 16 May 2019 - 04:12 PM, said:

Small business pays tax at 27.5% so their FF rate is 27.5%
Assuming bigger business yes it’s 30%. What you’re missing is that tax is paid in cash to the ATO. And it’s gone. If a company makes $1.000,000 profit it only has $700k left to pay as a dividend.

The $700k dividend can be fully franked with $300k franking credits assuming the company has sufficient balances in its franking account.

The taxpayer gets taxed on the $1m even though they only receive the $700k. The difference is the franking credit.

If the franking credits is less than the actual tax payable this means the taxpayer has to top up. If more they get a refund.

This is to stop double taxation.

If a company declares a dividend of $1m with $300k FC the taxable income is $1.3m and part of the dividend is unfranked.

But the changes made under Howard go further than double paying tax to refunding to those who neve paid tax in the first place (Unless you see the tax paid by the company as paid in essence on behalf of the tax payer?)

#13 SplashingRainbows

Posted 16 May 2019 - 04:20 PM

I didn’t provide you my personal opinion at all.
I provided you the rules and the policy rationale of the government that made the rules.

#14 Feral-as-Meggs

Posted 16 May 2019 - 04:24 PM

It makes sense when you think of the dividend as being the profit earned by the company’s owners (shareholders).  

Why should it have tax paid on it twice (once at the company rate and again at the taxpayers marginal tax rate).

Franking credits allow for it to be taxed effectively at each shareholder’s own marginal tax rate.  

The vexed issue is that self funded retirees (with a SMSF in its pension phase) aren’t actually paying tax.  So there is nothing to offset.  So they just get a cheque for the whole amount of the credit.  

That’s the big issue - why shouldn’t retirees pay income tax like everyone else.  




#15 SplashingRainbows

Posted 16 May 2019 - 04:34 PM

And that is the issue that should be fixed. Directly not in a roundabout way that won’t even work.

This is not just an SMSF issue. It will affect SMSFs whondont make changes but retirees of the major super funds will retain their tax benefits and you all won’t know about it. It’s just not as clear as it’s all wrapped up in ‘earnings’ not directly traceable.

SMSFs in pension phase will just do what the big funds do and seek to add contributing members. The tax on employer contributions of those members will be offset by the franking credit retaining the value of the FC for the SMSF. Legal and exactly what the big funds do.

Members with more than $1.6 m are now paying tax on fund earnings due to changes 1 July 2017. Most ‘research’ and ‘analysis’ I’ve seen is on 2015 or 16 figures which does not have this change factored in.

It’s not the super wealthy who will be affected.

They should fix the super rules causing the problem not try and attack it in a roundabout way.

#16 Literary Lemur

Posted 16 May 2019 - 04:39 PM

View PostSplashingRainbows, on 16 May 2019 - 04:20 PM, said:

I didn’t provide you my personal opinion at all.
I provided you the rules and the policy rationale of the government that made the rules.

Is this directed at me? If so sorry but I think I'm missing the point being made.

#17 Dianalynch

Posted 16 May 2019 - 04:58 PM

View PostFeral-as-Meggs, on 16 May 2019 - 04:24 PM, said:

It makes sense when you think of the dividend as being the profit earned by the company’s owners (shareholders).  

Why should it have tax paid on it twice (once at the company rate and again at the taxpayers marginal tax rate).

Franking credits allow for it to be taxed effectively at each shareholder’s own marginal tax rate.  

The vexed issue is that self funded retirees (with a SMSF in its pension phase) aren’t actually paying tax.  So there is nothing to offset.  So they just get a cheque for the whole amount of the credit.  

That’s the big issue - why shouldn’t retirees pay income tax like everyone else.  

This! It's my understanding some tax was paid on income from super until 2007, until Costello bribed voters with it being untaxed - so in effect retirees have been double dipping on having both a tax refund AND not paying income tax.

Yet they're probably the same people who agreed with Hockey that paid parental leave and workplace maternity leave was double dipping. Mutter mutter mutter.

#18 SplashingRainbows

Posted 16 May 2019 - 05:49 PM

View PostLiterary Lemur, on 16 May 2019 - 04:15 PM, said:



But the changes made under Howard go further than double paying tax to refunding to those who neve paid tax in the first place (Unless you see the tax paid by the company as paid in essence on behalf of the tax payer?)
Sorry LL I thought you were meaning me personally with your usage of ‘you’. I can see you may have intended it to be anyone.




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