With the election coming up and Tony Abbott looking to introduce policy to cut the company tax rate from 30% to 28.5% I have received a number of queries on how this will affect dividend payments.
If the new rule is introduced, any fully franked dividend you receive will only be franked to 28.5% instead of the normal 30%. So if you have $100,000 fully franked dividend at present this means that you receive $70,000 in cash and $30,000 in franking credits. Under the new rule you would receive $71,500 in cash and $28,500 in franking credits.
How this affects you will depend on the structure you receive the payment in:
- Individuals – if your tax rate is above 28.5% you will need to pay the extra tax in your annual tax return. For most investors this means that you will pay more in tax but remember you also received more in cash as well.
- Trusts – the tax affect on trust will depend on whom you distribute the fund to.
a. If you distribute to individuals then same as above.
b. If you distribute to a company then there is no affect as the beneficiary company is also on the 28.5% tax rate and will simply offset the tax payable on the distribution with the attached franking credit.
- Superannuation – the affect on your superannuation will depend on whether you are in accumulation or pension phase.
a. Accumulation – on $100,000 you will now receive $71,500 cash and $28,500 in franking credits. This will be taxed at 15% or $15,000 as such your refund from the franking credits will be $13,500 instead of $15,000, However you did receive an extra $1500 in cash which evens it out.
b. Pension – as you do not pay tax on earnings in pension phase it will make no difference. You will receive a tax refund of $28,500 for the franking credits and receive a extra $1500 in cash as such you receive the same amount. If anything it will improve your cash flow, as you will receive the $1,500 earlier.
Overall this change will only affect the individual who receives dividends and is on a tax rate higher than 28.5%.
For more information please contact us on 07 4771 4577.