Amount able to be earned in dividends and not pay tax

[Aaron_C]

Capital gains is a form of 'statutory income' - that is, it is not income under the common law, but deemed to be income by legislation. But in the grand scheme of things it becomes 'taxable income' which is where you get tax on it. Many years ago franking credits were not refunded if there was an excess amount - that was changed during the Howard government I think.

Just also note that franked dividends don't always have to come from dividends. They can also come from share buybacks - a big example of this would be mining giants like BHP. They don't pay much dividends so their franking credits from their massive profits can go wasted. So what happens is they 'buy back' shares from shareholders. They can load up the franking credits into the buyback so the shareholders receive this without having to get a standard bi-annual dividend.

 

[Joel]

A semi-related question regarding taxes and shares.

Can you own shares through a trust? Would you then be able to use negative gearing with investment property against the dividends from the shares? This way get asset protection with negative gearing benefits.

 

[alexlee]

A semi-related question regarding taxes and shares.

Can you own shares through a trust? Would you then be able to use negative gearing with investment property against the dividends from the shares? This way get asset protection with negative gearing benefits.

Yes, you can own shares in a trust. You can also own a negatively geared property in the same trust and offset tax losses from property against dividends.

In practice, this isn't a good idea, because 1) franking credits are lost if not distributed from a trust, and a trust can't distribute if it's in a net tax loss position. So if the trust has 5k in franked dividends and 10k loss from the property, the franking credits are lost because the trust doesn't have taxable income to distribute.

2) the 'value' of the tax losses in a trust is the marginal tax rate of the beneficiary with the lowest taxable income, so deductions in a trust have less value than deductions to a taxpayer with a higher marginal tax rate.

3) any issues with the property means the shares are also at risk, which partly negates asset protection. A family trust that holds only shares, for example, would be at less risk as shares can't go negative and shareholders (in listed companies, anyway) won't be sued as they have limited liability. Landlords, on the other hand, can be sued.

 

[alexlee]

Many years ago franking credits were not refunded if there was an excess amount - that was changed during the Howard government I think.

About 10 years ago, I think? Significantly increased the value of franking credits to low income earners.

Just also note that franked dividends don't always have to come from dividends. They can also come from share buybacks - a big example of this would be mining giants like BHP. They don't pay much dividends so their franking credits from their massive profits can go wasted. So what happens is they 'buy back' shares from shareholders. They can load up the franking credits into the buyback so the shareholders receive this without having to get a standard bi-annual dividend.

The technical definition is that part of the buyback price is 'capital' in nature, with the rest being a franked dividend. A technicality, but an important one, in that the franking credits are still from dividends. This sort of buyback often results in large franked dividend income, and a capital loss (or at least much lower capital gains than would be the case for a market sale).

 

[Terry_w]

I think it best to own shares in a separate trust because the trust may need to make a family trust election. That way the other assets such as real property are not subject to the restrictions of the family trust election

This trust can then distribute to individuals or another trust with a loss. But there are complex rules in involved here which need to be considered.

 

[Crabnet]

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.

To reiterate:
You start with a taxable income which may be less than you actual income.
Things which can reduce your actual income would be:
Allowable deductions against rental income.
Interest on borrowings to fund purchase of dividend producing shares.
Self employed people contributing to their super funds, (mostly taxed at 15% in the fund)
Discounting any capital gains in the financial year.
and etc.

Tax is worked out on taxable income.

Tax offsets are then applied where applicable.
Things like the following reduce the tax payable:
Low Income offset.
Mature age workers offset
and etc.

Then any medicare and flood levies are added to the tax payable.

Then any tax credits are applied which include things like:
PAYG instalments.
Tax withheld due to no TFN quoted
Foreign tax credits.
Franking tax offset.

Leaving either a tax liability or refund.

 

[marg4000]

Even if you are below the tax threshhold, shares with franking credits are still an asset. You can lodge a form with the ATO and receive the tax withheld.
Marg

 

[Terry_w]

Just stumbled on this article on Super and dividends
http://www.smh.com.au/money/super-and-funds/diy-super-tax-strategies-20120214-1t2mq.html

 

[Terry_w]

What about investing in your SMSF when in pension phase. Nil tax is payable so imagine if you invested in high yielding blue chip shares.

eg. some of the banks were yielding 8% a few weeks ago.

$1,000,000 in a mixture of shares, could yield:

$80,000 in dividends
$34,285 in franking credits

Total income would be $114,285

11.4% pa plus capital growth/loss

 

[Mry]

For the 2011 year, you can earn $99,234 in franked dividends (and nothing else) and not pay tax.

$99,234 x 10 / 7 = $141,763 in taxable income.
$99,234 x 3 / 7 = $42,528.86 in franking credits.

Tax on $141,763 = $42,528.75

11 cent refund.

For the 2012 year, you can earn $94,315 in franked dividends (and nothing else) and not pay tax.

$94,315 x 10 / 7 = $134,736 in taxable income.
$94,315 x 3 / 7 = $40,420.80 in franking credits.

Tax on $134736 = $40420.72

8 cent refund

Tax rates for 2011 and 2012 haven't changed, the only difference between each year is the flood levy.