Superannuation Discussion + market volatility

[burmans]

If this is the case you'd surely only need to transfer $1 less than the $1.6m TBC to be able to do this!

Edit: clearly great minds think alike, I've been beaten to this thought.

 

[Quickstatus]

So then the question becomes: how far under the $1.6mill mark do you need to be? Is $0.01 enough, or $1, or $100, or $1000, or what? The thought of $0.01 appeals to the AFFer in me...

I have no idea. I don’t know for sure whether my theory is correct though many agree with it.

 

[Flying mermaid]

Read an article a few days ago (can't find it now though) which made sense to my simple thought process. It likened franking credits paid to the ATO to PAYG tax payments, which I have always viewed them, since they are included in one's income and also as tax credits.

Is my thinking below correct?
If the company tax rate were to be reduced then I would expect a fully franked share tax credit to reduce and the dividend paid to the investor would increase, if the 'total dividend' (div + FC) maintained the same value?

Just escalating that thought somewhat, what is there to stop a company that currently pays a fully franked (30%) dividend from not paying franking credits and just increasing the value of the dividend paid to the investor.

in theory yes that is correct, if the company is paying less tax, the profit after tax will be higher and they could as you say pay out a bigger dividend with a smaller franking credit so the amount received stays the same. However the reason for giving the tax reduction is that it would allow for more capital investment and higher wages, so if that eventuates then profit after tax will not increase, resulting in the same dividend amount with a smaller franking credit, thus reducing gross amount received by the shareholder.

I think it is one of those unknowns, as it will differ from company to company.

 

[Quickstatus]

Read an article a few days ago (can't find it now though) which made sense to my simple thought process. It likened franking credits paid to the ATO to PAYG tax payments, which I have always viewed them, since they are included in one's income and also as tax credits.

Is my thinking below correct?
If the company tax rate were to be reduced then I would expect a fully franked share tax credit to reduce and the dividend paid to the investor would increase, if the 'total dividend' (div + FC) maintained the same value?

Just escalating that thought somewhat, what is there to stop a company that currently pays a fully franked (30%) dividend from not paying franking credits and just increasing the value of the dividend paid to the investor.

In the end the total tax paid for each dollar of taxable profit will be the same because it is ultimately taxed at the marginal tax rate of the shareholder.

 

[Flying mermaid]

In the end the total tax paid for each dollar of taxable profit will be the same because it is ultimately taxed at the marginal tax rate of the shareholder.

that is true but the amount the shareholder gets pre and post company tax cuts can be different. E.g for Roger and a I being retired (and leave Shorten’s potential changes out of it), the franking is refunded so Company A pays a 70c dividend and franks it to the current 30c. We get $1 in the hand. Company tax is reduced to say 25%. If the company continues to pay the 70c dividend fully franked, we now get 93c .

It is a bit of an unknown as to whether the company will invest the tax cuts or use it to increase dividends - the former would be better for the company/country, so shareholders see a short term drop for possible longer term growth.

 

[Quickstatus]

that is true but the amount the shareholder gets pre and post company tax cuts can be different. E.g for Roger and a I being retired (and leave Shorten’s potential changes out of it), the franking is refunded so Company A pays a 70c dividend and franks it to the current 30c. We get $1 in the hand. Company tax is reduced to say 25%. If the company continues to pay the 70c dividend fully franked, we now get 93c .

It is a bit of an unknown as to whether the company will invest the tax cuts or use it to increase dividends - the former would be better for the company/country, so shareholders see a short term drop for possible longer term growth.

That’s not comparing apples with apples.

$1 profit taxed at 30%. Franking credit 30c
$1 profit taxed at 25% Franking credit 25c

Under existing regime
Dividend is 70c fully franked (30c credit)

Under new regime
Dividend is 75c fully franked (25c credit)

Apples with apples = all profit paid out as dividend in both circumstances.

Still $1 in your hand.

Your income is really the dividend plus franking credit and there is never a guarantee of dividend because any company may elect to pay or not pay any quantum of dividen year on year.

The variation in take home income is not a function of the company tax rate (the ultimate taxation is the marginal rate of the shareholder - in your case 0%) but rather the quantum of the actual dividend paid out year on year

 

[Flying mermaid]

That’s not comparing apples with apples.

$1 profit taxed at 30%. Franking credit 30c
$1 profit taxed at 25% Franking credit 25c

Under existing regime
Dividend is 70c fully franked (30c credit)

Under new regime
Dividend is 75c fully franked (25c credit)

Apples with apples = all profit paid out as dividend in both circumstances.

Still $1 in your hand.

Your income is really the dividend plus franking credit and there is never a guarantee of dividend because any company may elect to pay or not pay any quantum of dividen year on year.

The variation in take home income is not a function of the company tax rate (the ultimate taxation is the marginal rate of the shareholder - in your case 0%) but rather the quantum of the actual dividend paid out year on year

.well of course dividends vary year on year that wasn’t what we are discussing really, it is the likely impact of the company tax cuts.

Your scenario is perfectly possible - everything stays the same after tax profit rises so net effect of a higher dividend but a lower franking credit means you get the same,

What I am saying is that if that is what happens then I think the company tax cuts are pretty pointless. the rationale behind them was to leave more money in the hands of the company so they were able to increase wages ( the Walmart effect) or invest in capital expenditure. If that happens (and I think it would be good if it did) then it is possible that the dividend stays the same because in fact after tax profit stays the same so the gross amount to the shareholder drops.

As I said before it will vary from company to company what they do with the extra money from the tax cuts. (If they happen).

 

[Pushka]

I really need to read the last couple of pages before the Pinot.

 

[Quickstatus]

I really need to read the last couple of pages before the Pinot.

Usually such topics are best consumed AFTER the wine. Pinot might not be strong enough though....

 

[Flying mermaid]

I really need to read the last couple of pages before the Pinot.

Mr FM is out playing war games, so I decided to catch up on these threads - no Pinot for me

 

[JohnM]

Mr FM is out playing war games, so I decided to catch up on these threads - no Pinot for me

Meet your own war games....

 

[CaptJCool]

Read an article a few days ago (can't find it now though) which made sense to my simple thought process. It likened franking credits paid to the ATO to PAYG tax payments, which I have always viewed them, since they are included in one's income and also as tax credits.

Is my thinking below correct?
If the company tax rate were to be reduced then I would expect a fully franked share tax credit to reduce and the dividend paid to the investor would increase, if the 'total dividend' (div + FC) maintained the same value?

Just escalating that thought somewhat, what is there to stop a company that currently pays a fully franked (30%) dividend from not paying franking credits and just increasing the value of the dividend paid to the investor.

Yes, franking credits are like PAYG-W because back in the day they were used as a credit against tax owed.

It wasn't until 2006 when super was made completely tax-free, the current circumstance began. The Govt didn't elimnate the tax-free threshold, so in effect, people on pension modes got "two bites of the cherry". Unlike us bunnies working where investments are fully taxed at marginal rates

Re your second question. Smaller % of franking credits is in effect a book entry. The total dividend would still I expect be the same value. At its worst, some investors would need to find out of their own pocket, the extra top-up to cover the tax as Individual rates aren't changing. At best, Refunds would be 1/6th lower as the credit is 25% not 30%.

The first hits people who can "afford to pay". The second hits people who can't "afford to lose"

in effect, this mirrors the modified Labor proposal....different means to the same ends.

 

[Deleted member]

Yes. Totally agree. They are targeting SMSF completely.

But not specifically, it’s all about the Robin Hood mentality, take form the (so called) rich, to give to the poor.
The sill thing is that small super account holders receive the exact same benefit as larger accounts and SMFS’s. And when you consider the fact that a considerable number of SMSF’s have Real Property as their major asset, I do wonder if Shorten’s left wing dogma has gotten in the way of sensible policy. I suppose however, that limiting the imputation credits to just the shares is in line with the original intent of the legislation.

 

[JohnK]

I really need to read the last couple of pages before the Pinot.

I'm afraid alcohol won't help my cause. And since the discussion is $1.6million + some loose change I won't ever have that problem either.

 

[cove]

We have been listening to the Royal Commission. Sad times for those who were fleeced by financial planners that’s for sure. Not all financial planners are incompetent.
When I was an accountant in public practice I had any commissions sent back to the client. Secret commissions should not happen in any financial dealings whether it is off insurance or mortgage booking.Disclosure should be legislated.

 

[Pushka]

We have been listening to the Royal Commission. Sad times for those who were fleeced by financial planners that’s for sure. Not all financial planners are incompetent.
When I was an accountant in public practice I had any commissions sent back to the client. Secret commissions should not happen in any financial dealings whether it is off insurance or mortgage booking.Disclosure should be legislated.

Wish they’d investigate JBWere and Club Financial Services.

 

[RB]

We have been listening to the Royal Commission. Sad times for those who were fleeced by financial planners that’s for sure. Not all financial planners are incompetent.
When I was an accountant in public practice I had any commissions sent back to the client. Secret commissions should not happen in any financial dealings whether it is off insurance or mortgage booking.Disclosure should be legislated.

Regulatory Guide RG 175 Licensing: Financial product advisers—Conduct and disclosure - rg175-published-22-march-2017.pdf

 

[cove]

Thanks for that. Page 34 is quite significant.

 

[RB]

Thanks for that. Page 34 is quite significant.

I think the main thing is that for the vast majority who are compliant, there are many hoops to jump through. Unfortunately there are "shorcutters" in all many aspects of life

 

[Quickstatus]

If this is the case you'd surely only need to transfer $1 less than the $1.6m TBC to be able to do this!

Edit: clearly great minds think alike, I've been beaten to this thought.

Straight from horses mouth about transfer balance cap indexation. STAY BELOW THE CAP FOLKS!!!