Ann: Capital Management Update, page-35

The only difference between a 16c Capital Return and a 16c unfranked Dividend is the tax. If you are on a zero tax rate, then there is no difference.

There are two benefits of a Capital Return over an unfranked Dividend.

Firstly, the taxpayer gets to defer the tax payable on the 16c from the payment of the 16c to the date when the shares are sold. The Value of this is T – T *(1+r)^-n. Where T is your tax payable, r is your expected return you can achieve and n is the number of years you expect to hold your shares. So if you plan to sell your shares in 5 years and can achieve 8%pa, the Value is about 32% of the tax payable. More than most people think.

The second benefit is that if you hold the shares for more than 12 months only half of the 16c is taxable (66.7% for SMSFs).

Using the above example of 5 years and 8%pa, the combined Value of these two benefits means that you effectively save $66 per $100 of tax that would be paid had it been an unfranked dividend (a huge benefit and why this is so important for it to be a Capital Return). Putting it another way, you only pay $50 tax in 2026 tax rather than $100 now, the present value of $50 is $34.

If your tax rate is low, then your tax payable will be low, so a 66% reduction in your tax bill doesn’t really matter.

There is a third benefit. Those with CF Capital Losses and those that can generate capital losses elsewhere, can offset capital losses against the 16c Capital Return and not pay any tax at all.