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?
