Frustrating SP, page-17

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SA1588

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21/02/18

12:52

Post #: 31220473
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Originally posted by krugerrands ↑

The more I look at it the more I think Buffet has a point at not paying a dividend at all and focus on growing the share value..... if you need the money - sell some shares!

Apologies for another crazy long post, for the curious of mind and those that think they might learn, read on.
I write this to crystallize my own understanding and to contribute in some way.
Based on comments I see around sometimes I don't think people understand the following well in terms of yield, tax, franking credits etc.

It really comes down to the tax scheme of your country but I will focus on Aus.

Who has the higher effective ( not marginal ) tax rate? The company or shareholder.
Can the tax liability be passed on to the shareholder?
What are the CGT rules?

In Australia the marginal company tax rate is 30%.
Assuming a company made $100 profit, they would pay $30 tax ( if there are not deductions etc ).
They may have a dividend payout policy of 70% - or in this case $70.

In the Australian tax regime the 30% tax paid in the hands of the company can be claimed back by the shareholder via the imputation system.

HOWEVER you actually have to qualify for these franking credits!!!
No one ever mentions that.
For one, you have to hold the shares at risk for 45 days excluding the days you bought and sold them, so really 47 days. ( this rule don't apply if you receive less than $10,000 in dividends though )
There are some other rules too that I haven't wrapped my head around yet.

Anywho, in term of taxation this means.
$70 Grossed up div made up of
$21 Franked amount to claim if eligible
$49 Paid directly to shareholder

Now.....
If your effective rate is higher than 30% you won't be able to claim ANY franked credits and if fact would have to pay MORE tax!!
If your effective rate is lower than 30% you will get the portion back that you are lower.

Really all that is happening is that the tax liability on the grossed up dividend is passed to the shareholder.

Company liability = $70 * 30% = $21 Tax payable
Individual @ 20% effective taxrate = $70 * 20% = $14 Tax payable
Tax credit = $21 - $14 = $7

This means you can now claim back $7 of tax credits.

That is if you ignore the fact that a company can create value through capital gains.

1. $70 dividends @ 20% effective rate is $56 in pocket

2. $70 without CGT without discount ( held for less than 12monhts ) gives me.....
exactly the same $56 in pocket!!

3. $70 WITH CGT discount gives me $63.... ding ding ding.....
We have a winner. That is a tax rate of only 10%.

So....

- Give me capital growth ANY time of the day before anything else.
- Screw high yields if you are not growing the share price also ( see TLS for the perfect example ).

Of course if a company makes a big profit AND cannot effectively invest the capital it has to pay this out to the shareholders unless it is accumulating cash for future use.
In that case I will be happy or sad about that depending on my personal effective tax rate. less than 30% yeah, more than 30% nay.....

Realizing the above I started looking at dividend yields in a different light....

Expand

Super funds pay tax at 15% or nil. So the they recover most or all of the full franking credits.

Geared investors pay tax at < 30%.

RHC Price at posting: $68.84 Sentiment: Buy Disclosure: Held
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