Shortens franking credit policy, page-83

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Dave R

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29/08/18

07:53

Post #: 35251499
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Originally posted by satyr ↑

So this is my current understanding of how the system works, if this is correct?

Scenario A)
Say I buy $1M of stock in a company, for my stock the company makes $60k profit and pays $18k in tax which becomes $18k in franking credits, and a NPAT of $42k

The company pays me a dividend of $42k and gives me $18k in imputation credits and I do not earn any other income.

So, come tax time I report income of $42k which at the current tax rate $5,197 plus medicare levy of $840.
In the current system that would leave me with $11,963 in credits, which would be refunded.

Scenario B)
On the other side of the coin, what if I had $10M of stock in a company, for my stock the company makes $600k profit and pays $180k in tax which becomes $180k in franking credits, and a NPAT of $420k

The company pays me a dividend of $420k and gives me the $180k in imputation credits, again no other income.
My taxable income is $420k so I pay $243k income tax and $12k medicare levy, minus the $180k of credits I now owe the tax department $75k

Now...

If my understanding is correct, the theory is the tax should be paid at my marginal tax rate, and not the companies (as the company did not get to keep the profit). In scenario A the company paid too much tax to the government on my behalf so the government refunds it. In scenario B the company did not pay enough tax on my behalf, so I pay the rest I owe.

If the new Labor policy ends up law, it basically puts a floor on dividend payments at the company tax rate by taking it off a low income earner ("ignoring the fact that they own $1M of stock in a company").

These days with companies increasingly using tax avoidance techniques to minimise tax, wouldn't it be better to just remove the whole franking system, and have companies pay tax on profits after dividends? What kind of side effects would that have?

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Australia and New Zealand are the only countries in the world that issue franking credits.
It's a matter of opinion whether their introduction was a good idea or not. Every other country seems to get by OK without franking credits.
I have no strong opinion one way or the other on this matter, however the extension to the way they work introduced by Howard to give tax refunds to people who don't pay any tax was a step too far which was never the intention of having franking so I oppose that part.
Dave R.
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