If there is one thing that stirs me up it is a politician stating numbers that just don’t add up. I’m talking about the aspirational treasurer – Mr Chris Bowen. This week he made the statement in respect of Dividend Franking credits under the imputation system. Labor wants to cut back on these credits to retirees. He said - “A nurse who earns $67,000 a year, we charge $13,000 in tax. But a retired shareholder who has $67,000 in income we charge her zero tax and then write her a cheque for $27,000. That is not OK,” Its a factually incorrect statement! If it was correct – he would have my full support as something would definitely be wrong with the system.
Now to be clear, the Imputation system that applies to Fully Franked Dividends was brought in to prevent double taxation. That is – if companies were being taxed on their profits and then chose to distribute those profits (after tax) to their shareholders, it seemed unfair that the shareholders would pay tax again on those net dividends at their personal marginal rates. At the time the tax rates meant that the profits were taxed at around 65% before the legislation was enacted. So it made sense to change it as it stifled investment in Australian Companies.
So how does the system actually work? Let’s take ABC Pty Ltd. It has made a profit of $1,000 for the year and it pays tax at the corporate tax rate of 27.5%.
Net Profit
$1,000
Tax on Profit at 27.5%
($ 275)
Net Profit after tax
$ 725
Available Fully Franked Dividend to Shareholder
$1,000
The company could issue a dividend to the shareholder of $1,000. The shareholder needs to include this in their personal Income Tax returns and claim a tax credit of $275. The Shareholder will pay tax at their personal marginal rate of what ever their total income comes to. It maybe as high as 45% on the dividend.
So getting back to Mr Bowen’s example – if the retiree mentioned in Mr Bowen’s example had all their income as Fully Franked dividends – the maximum credit would be $18,425. However the tax payable on the $67,000 income is $13,322 plus Medicare levy of $1,340. (I am assuming both taxpayers are single) hence the maximum refund would be $3,763 NOT $27,000.
If you worked the numbers backwards ie lets say the retiree is entitled to a $27,000 credit for their share investments then we are talking about someone who would be declaring over $98,000 income compared to the nurse on $67,000. That’s simply an unfair comparison. However the retiree would receive a refund of $1,200. No where near $27,000.
For more information feel free to contact the team at UHY Haines Norton 0749 721300.
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