Are You Franking Mad?
With the Federal Election most likely to be held in May 2019 increasing focus is being paid to tax proposals by the major political parties.
Normally mundane discussions about franking credits has escaped the domain of professional tax practices and financial planning firms. Stories about dividends and franking credits has never had such popular media attention!
The proposal by the Labor Party, would limit recovery of ranking credit entitlements for some taxpayers. For example, pensioners who have not applied for the pension by a certain date.
The focus here is not on the politics. That is for you to decide.
Here, we are interested on the impact on taxable incomes of share investors for the current 2019 tax year, and most likely the 2020 tax year.
The proposal would effectively degrade the value of franking credits currently locked within companies, as many taxpayers would not get the same value as they can today.
The only way for a company to transfer the value of a franking credit out to its shareholders, is to pay a dividend which is ‘franked’, and includes the attaching franking credits.
Especially in the February 2019 reporting season of listed companies, there has been a significant number of companies announcing increased or special dividends. To many shareholders, this is great news as their dividend income has been boosted – at least for the current year.
This is going to boost the incomes of share investors for the current year. Possibly to higher marginal tax rates.
This is a shift in value currently locked up in companies that is finding its way into the hands – and tax returns – of investors. For some, this is going to cost them a lot of tax, especially if their marginal tax rates are higher than the value of the franking credit.
The legislation – if ever passed in the manner proposed – likely would not be operational until at least 1 July 2020. So this supercharged dividend income could continue into the next financial year. Especially if the Labor Party win the election.
If these rules affect you, you should be thinking about this now and making any decisions necessary so you do not get exposed to too much tax.
Otherwise you might really be mad, when it comes to pay the year-end tax bill and your franking credits do not cover your additional tax from special dividends.
Tax Services Australia has been helping Australians with quality, independent and reliable taxation advice since 2001. If you need independent and reliable advice that is focused on your needs, contact us today.