Treatment of Franking with Margin Loan

[traveller]

Hi All,

I am beginner in the shares investing world so please pardon my silly questions here. However, I will like to get a hang of how the franking credits will work in conjunction with the Margin Loan. For e.g lets say I have following situation:

own money 3000
loan 7000
Total 10000
interest on loan @ 8.25% 578

dividend @ 4% fully franked 450

grossed up dividend 643

tax paid by company 193


tax payable by me @ 40% which is (643-578) @ 40% 26

tax paid 193
tax refund 167
own money 3000

I will like to know if my calculations are correct regarding the treatment of franking credits?

Thanks all.

 

[The Y-man]

I am not sure if it is easier to simply treat your franking credits as if you owned the 10000 worth of shares.

The margin interest merely affects your taxable income (i.e. deduct it from your other income to get your "taxable income")..... hope this makes sense...

Cheers,

The Y-man

 

[Brenda Irwin]

My taxation reads gross income (including all share dividends & franking credits), less total deductions (includes interest paid on loan), less franking credits = Taxable income. Then calculate tax on taxable income.
Don't forget medicare levy (1.5% of taxable income) if applicable.

 

[bort]

a 4% dividend on 10,000 is $400 not 450 ....
so say the franking credit is $200 (i know thats not quite right, but close enough ...)

in your assessable income you include:

dividend $400
franking $200

total income $600

you then take off allowable deductions

ie interest $578

So your taxable income from shares alone is $32

You then calculate tax based on that taxable income, so assuming you are in the 41.5% bracket, tax would be $13

and finally you then add back your franking credit (which is a tax credit)

so your tax becomes $200 credit minus $13 in tax

net tax REFUND due to shares $187

(actually traveller's calculation therefore looks about right I think, just maybe a bit confusing. I think Brenda's calculation is not quite correct.)

 

[traveller]

Thanks all. Its much clearer now.