Amount able to be earned in dividends and not pay tax

[Terry_w]

I am doing a course on taxation and we have covered dividends and franking credits etc.

I've done some calculations and it appears someone could earn about $99,000 or so pa and not have to pay tax at all if this income came from fully franked dividends and there was no other income source.

eg.
$99,000 in dividends,
$42,428 gross up amount ($99,000 x 30/70)
$141,429 in taxable income

Tax on this amount is
$40,278, plus
$2,121 medicare levy
$42,400 in total tax

but,
$42,428 in franking credits will be received, so

Tax payable = $28 refund!

Does this sound correct?

I had no idea how franking credits worked all these years, despite owning shares and receiving dividends.

 

[Dazz]

Yes Terry, that's how they work. You're onto a winner.

The grey nomads doing the laps of Australia in their caravans, the ones who bought CBA shares back in 1991 know all about imputation credits.

They do that, whilst residential Landlords stay home and wait for a phone call from their Tenants to come and fix something at great expense.

Noel Whittaker, in his 2nd book, More Money, had a great chapter on this explaining everything very simply with a great table and also a cartoon depicting a man being handed a lovely cheque from the company and then Santa Claus handing him his imputation credits.

That was back in the early 1990's too.

See one of my previous posts....


http://somersoft.com/forums/showthread.php?p=801915&highlight=imputation+credits#post801915

 

[NedKelly]

Does this sound correct?

That is correct, but since the average dividend is about 3% you would need about $3,000,000 invested in shares to get that return.

 

[jaycee]

Someone roughly sort explained it to me, then sometime later it sort of clicked. I thought I was the only one though ! now though, I don;t get as surprised when talking with people about this, even the ones who maybe purchasing or have purchased shares or get a few shares as part of their remuneration through employee share schemes.

1 question that I think I know the answer but not so sure that I have is - If someone earned less say $35k + franking credits (fully franked so 30% tax paid)... and they earn (gross) another $30k income from ?something else.

Total income = $65k
+"tax" paid via franking credits of $15k

Would there still be income tax payable on the other earnings despite there having paid MORE in franking credits than they needed to ?

Hope that makes sense.

 

[Terry_w]

That is correct, but since the average dividend is about 3% you would need about $3,000,000 invested in shares to get that return.

Hi Ned

Banks are around 6%.

ANZ is currently 6.00
CBA 6.61%
NAB 7.06%
SUN 4.88%

So if someone just needed $50,000 pa income (in the hand) and had invested in bank shares it wouldn't be unachievable. May not be a good idea to have all your shares in the one sector though.

 

[jrc77]

Own your shares in a discretionary family trust and double that amount of income before you and your wife pay tax. Nice retirement lifestyle

I was pointing this out to friend a few months ago who has a penchant for sticking all savings in an online savings account and current retirement strategy is to live off interest from term deposits. Sure your capital is "protected" (except for that bit about getting eroded by inflation) but you'll get bugger all income after tax.

Regards,

Jason

 

[Terry_w]

Someone wanting to obtain an income of $50,000 in the hand would only need about $741,733 in shares yielding 6%. If dividends Fully franked.

 

[Rob G.]

Own your shares in a discretionary family trust and double that amount of income before you and your wife pay tax. Nice retirement lifestyle

I was pointing this out to friend a few months ago who has a penchant for sticking all savings in an online savings account and current retirement strategy is to live off interest from term deposits. Sure your capital is "protected" (except for that bit about getting eroded by inflation) but you'll get bugger all income after tax.

Regards,

Jason

In this situation, beneficiaries of a discretionary trust cannot satisfy the holding period rules unless the trust makes a FTE.

Think about this carefully.

Cheers,

Rob

 

[alexlee]

I am doing a course on taxation and we have covered dividends and franking credits etc.

I've done some calculations and it appears someone could earn about $99,000 or so pa and not have to pay tax at all if this income came from fully franked dividends and there was no other income source.

eg.
$99,000 in dividends,
$42,428 gross up amount ($99,000 x 30/70)
$141,429 in taxable income

Tax on this amount is
$40,278, plus
$2,121 medicare levy
$42,400 in total tax

but,
$42,428 in franking credits will be received, so

Tax payable = $28 refund!

Does this sound correct?

I had no idea how franking credits worked all these years, despite owning shares and receiving dividends.

While all this is true, excess franking credits are refunded to the individual. Your statement 'not having to pay tax' is misleading. You're saying 'you wouldn't get a tax bill when you lodge your return'. Tax has already been paid via corporate taxes, reducing your cash dividends, and you pay for the tax on your income via reduced franking credit refunds.

If you deliberately increase the tax withheld from your salary, for example, you might get a refund when you lodge your tax return. Or have less tax withheld so that you have more each month but have to pay tax when you lodge your return. Neither is inherently better, since you're paying the same amount of total tax.

The calculation should be made on the total tax you pay or at least the after tax income. The tax payable or refundable at lodgement is a small part of it.

 

[jaycee]

While all this is true, excess franking credits are refunded to the individual. Your statement 'not having to pay tax' is misleading. You're saying 'you wouldn't get a tax bill when you lodge your return'. Tax has already been paid via corporate taxes, reducing your cash dividends, and you pay for the tax on your income via reduced franking credit refunds.

If you deliberately increase the tax withheld from your salary, for example, you might get a refund when you lodge your tax return. Or have less tax withheld so that you have more each month but have to pay tax when you lodge your return. Neither is inherently better, since you're paying the same amount of total tax.

Too true, that's why it was so surprising to find out what fully franked dividend meant.

 

[redwing]

That is correct, but since the average dividend is about 3% you would need about $3,000,000 invested in shares to get that return.

Yes Terry, that's how they work. You're onto a winner.

The grey nomads doing the laps of Australia in their caravans, the ones who bought CBA shares back in 1991 know all about imputation credits.

They do that, whilst residential Landlords stay home and wait for a phone call from their Tenants to come and fix something at great expense.

Noel Whittaker, in his 2nd book, More Money, had a great chapter on this explaining everything very simply with a great table and also a cartoon depicting a man being handed a lovely cheque from the company and then Santa Claus handing him his imputation credits.

That was back in the early 1990's too.

See one of my previous posts....


http://somersoft.com/forums/showthread.php?p=801915&highlight=imputation+credits#post801915

Next you'll be telling us that some of those grey nomads actually know what they're talking about and we could learn a lesson or two, the old europeans who came to australia worked hard and invested just as hard had their heads screwed on right and markets gardens on the outskirts of the shire can eventually make you a motza

That is correct, but since the average dividend is about 3% you would need about $3,000,000 invested in shares to get that return.

I recall reading in 2011 about a couple of the banks

1. Dividend yield 5.61 per cent, tax equivalent yield 8.01 per cent
2. Dividend yield 5.71 per cent, tax equivalent yield 8.16 per cent

With a dividend yeild of 4-5%, franking can take it up to 7%

Lower income earners (and super funds at 15%) get a bigger benefit

We just got a statement for the kids bank accounts (4 yrs & 7yrs) paying 4.5% interest and need to get them a tax file number as they are being hit with the higher tax rate

Actual bank shares are looking inviting

 

[alexlee]

1 question that I think I know the answer but not so sure that I have is - If someone earned less say $35k + franking credits (fully franked so 30% tax paid)... and they earn (gross) another $30k income from ?something else.

Total income = $65k
+"tax" paid via franking credits of $15k

Would there still be income tax payable on the other earnings despite there having paid MORE in franking credits than they needed to ?

Hope that makes sense.

The calculation of taxable income, tax payable and ultimate tax payable at lodgement are separate calculations, with tax payable having no direct relationship to tax payable at lodgement. (In the sense that having more tax credits doesn't actually affect your total tax payable, but of course reduces the amount payable on lodgement). I think the mistake many people make is that they think different types of income are calculated separately.

In your example, total taxable income is 35 + 15 + 30 = 80.

Tax payable is 17,550.

Tax due on lodgement is 17,550 less franking credits 15,000 = 2,550.

Tax is paid on all taxable income. THEN tax credits are deducted. If you have excess franking credits, they are refunded.

 

[alexlee]

Lower income earners (and super funds at 15%) get a bigger benefit

We just got a statement for the kids bank accounts (4 yrs & 7yrs) paying 4.5% interest and need to get them a tax file number as they are being hit with the higher tax rate

Actual bank shares are looking inviting

Kids pay a higher rate on non-earned income anyway, much higher than adults. The low income earner getting a bigger benefit thing is because low earners often pay less than the 30% marginal rate and so get dividends refunded. Kids pay 66% marginal from $417 income onwards. Buying bank shares, which have a much higher pre-tax yield than 5%, would produce more after tax income, but not as much as you think.

 

[jaycee]

The calculation of taxable income, tax payable and ultimate tax payable at lodgement are separate. I think the mistake many people make is that they think different types of income are calculated separately.

In your example, total taxable income is 35 + 15 + 30 = 80.

Tax payable is 17,550.

Tax due on lodgement is 17,550 less franking credits 15,000 = 2,550.

Tax is paid on all taxable income. THEN tax credits are deducted. If you have excess franking credits, they are refunded.

Thanks, I guess what I meant was... if I earned $ through fully franked dividends, and after deducting the income tax payable, there's a few $ left over, will those $ count as "tax already paid" on other income earned where income tax hasn't yet been paid ?

I had a feeling the answer would be no for some reason ?

hope that makes sense

.

 

[alexlee]

Thanks, I guess what I meant was... if I earned $ through fully franked dividends, and after deducting the income tax payable, there's a few $ left over, will those $ count as "tax already paid" on other income earned where income tax hasn't yet been paid ?

I had a feeling the answer would be no for some reason ?
.

Yes, it does, but probably not in the way you mean as I think you're confusing taxable income with tax payable. The order of the calculation is different. The tax office doesn't say 'this is how much tax is payable on the dividends, deduct the franking credits, then we calculate tax payable on your other income, then apply the excess franking credits towards that.

It calculates taxable income first, then calculates total tax payable, then applies franking credits (and other tax credits) to this total tax payable.

 

[redwing]

Kids pay a higher rate on non-earned income anyway, much higher than adults. The low income earner getting a bigger benefit thing is because low earners often pay less than the 30% marginal rate and so get dividends refunded. Kids pay 66% marginal from $417 income onwards. Buying bank shares, which have a much higher pre-tax yield than 5%, would produce more after tax income, but not as much as you think.

Thanks Alex

Great to see you back on the board again

I just logged onto ATO to check and saw this

Interest

If a child quotes their date of birth, they are entitled to a threshold of $420 per income year on interest. If they don't quote their date of birth, the threshold is the same as the adult threshold of $120 per income year.

Where the total interest earned during an income year is $420 or more, if the child:

quotes a TFN, the investment body will not withhold pay as you go (PAYG) tax
does not quote a TFN, the investment body will withhold PAYG tax at 46.5%.
This applies to the total interest earned (not just the amount above $420, or the payment period threshold equivalent).

If the child has had PAYG tax deducted, they will need to lodge a return to claim these amounts back from us. A child who does not have a TFN will need to get one before they can lodge a return.

Source

 

[alexlee]

Correct. It's a way to 'avoid' paying the 66% marginal rate for kids, by accepting the withholding tax deducted where a TFN is not provided. But this only applies for interest income and not, say, dividends.

But even at 46.5% marginal there's no advantage to holding savings in a child's name.

With the elimination of the low income tax credit for children, there are few tax benefits in having the income in the child's name.

 

[jaycee]

Yes, it does, but probably not in the way you mean as I think you're confusing taxable income with tax payable. The order of the calculation is different. The tax office doesn't say 'this is how much tax is payable on the dividends, deduct the franking credits, then we calculate tax payable on your other income, then apply the excess franking credits towards that.

It calculates taxable income first, then calculates total tax payable, then applies franking credits (and other tax credits) to this total tax payable.

ok, so franking credits will count as tax paid on other income.

For some reason I thought it may be something like the way Capital Gains are treated, where a capital loss can only offset another capital gain.

 

[alexlee]

ok, so franking credits will count as tax paid on other income.

For some reason I thought it may be something like the way Capital Gains are treated, where a capital loss can only offset another capital gain.

Capital losses are treated as a special type of loss. Capital gains and capital losses are both income concepts, though. Franking credits is a tax CREDIT, reducing tax payable. Reducing taxable income and reducing tax payable are very different things.

This stuff is pretty black and white, if confusing.

 

[jaycee]

Capital losses are treated as a special type of loss. Capital gains and capital losses are both income concepts, though. Franking credits is a tax CREDIT, reducing tax payable. Reducing taxable income and reducing tax payable are very different things.

This stuff is pretty black and white, if confusing.

Yeah I got it. Thanks