August 31st, 2009 | Financial Planning News, Tax Advice and Updates
Unlike income from cash or bonds, which is fully taxable at your marginal tax rate, Australian shares receive attractive tax concessions through the dividend imputation system.
Australia’s dividend imputation system can reduce and in some cases eliminate tax liabilities for domestic share investors. Given companies have already paid tax at the company tax rate, investors receive an offset in the form of imputation credits, these credits are equal to the amount of tax they pay on dividends. The higher the franking level the greater the benefit.
Some companies pay fully-franked dividends, with the maximum imputation credit of 30 per cent (equal to the company tax rate). Other companies pay partially franked dividends where the imputation credit will vary depending on the amount of tax they have paid on their profits.
Grossing up the dividend yield
When comparing yields across assets it is important to take into account the grossed up dividend yield (which includes franking credits). This is equal to: (Dividend per share + franking credit) x 100 / current share price
This table below shows the impact of a fully franked cash dividend of $1,400 for investors on different marginal tax rates. You can see the powerful impact franking has on reducing individual taxation liabilities.
| Year ended 30 June 2009 | |||||
| Taxable income thresholds | 0 -$6,000 | $6,001- $34,000 | $34,001- $80,000 | $80,001- $180,000 | $180,001 + |
| Marginal Rate of Tax | 0% | 15% | 30% | 40% | 45% |
| Cash distribution received (fully franked) | $1,400 | $1,400 | $1,400 | $1,400 | $1,400 |
| Franking Credits received | $600 | $600 | $600 | $600 | $600 |
| Taxable Distribution | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 |
| Tax payable @ marginal rate of tax | $0 | $300 | $600 | $800 | $900 |
| Less Franking Tax Offset | -$600 | -$600 | -$600 | -$600 | -$600 |
| Net Tax Payable | -$600 | -$300 | $0 | $200 | $300 |
| Effective tax rate on marginal dividend income | -30% | -15% | 0% | 10% | 15% |
Assumptions
- Tax on distribution is levied at the marginal rate of tax
- Medicare levy and surcharge are excluded from the calculations
- Any other available tax offsets are excluded from the calculations
As the above table shows, investors with a marginal tax rate of 30 per cent who receive a fully franked dividend can receive their distribution totally free of tax. Investors on higher marginal tax rates can reduce their tax liability while those on the lowest rates can receive a cash refund when imputation credits exceed their income tax liability.
Dividend imputation also benefits superannuation funds, which pay a maximum of 15 per cent tax. For example, self managed super funds will receive a tax refund of $215 for every $1,000 of fully franked dividends they receive. Pension funds, which are exempt from income tax receive a full cash refund for the value of the imputation credits.
Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can can assist you in finding investments with high franking credits to help build your wealth in a tax effective manner. For advice about how you can benefit from imputation credits and other wealth creation strategies, contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.