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The loss of refunds from franked dividends by Ed Chan

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The Labor party will stop giving refunds if receiving Franked Dividends results in a refund.

They argue that it was not fair that if you have not paid tax then you should not get a refund.

They are wrong.

They are both morally and technically wrong.

Why?

The owners of companies are the Shareholders.

Ultimately it’s the shareholders who end up with the profits via receiving dividends from the company and tax is then paid at the shareholder level.

However, the company withholds 30% tax from the shareholders dividends and sends this to the ATO on the shareholders behalf prior to paying the Dividend.

To say that shareholders have not paid tax and therefore should not get a refund is simply wrong.

How does it work?

A company makes profits and pays tax at 30% on this profit.

It then pays the net profits (after 30% tax is deducted) as a Franked Dividend to shareholders who own the company.

When the shareholder receives this profit/dividend they add it to their other income and tax is calculated on their total income.

However, to avoid paying tax twice on the same dollar of profit/income, the shareholder gets a credit for tax paid by the company.

This avoids the same dollar being taxed twice, once in the company’s hands and then again in the shareholders’ hands when it’s the same dollar being taxed.

Thus if the shareholders’ personal tax rate is 48%, he/she pays a top up tax of 18% after getting a credit of 30% for the company tax already been paid on the same dollar.

If the shareholders personal tax rate is 20%, he will get a refund of 10% after getting a credit of 30% company tax that had already been paid on this same dollar.

If the Labor government refuses to refund 10% (due to the shareholder not having paid personal tax), this effectively taxes the shareholder at 30% which is totally unfair when his/her tax rate is less than 30%.

This definitely hurts those on lower income because wealthy people will have other income to absorb the tax credits.

In other words, according to the Labor party, if a shareholder receives Franked Dividends that result in a refund (due to their personal tax rate being less than 30%), then they should lose this refund, effectively taxing them at a 30% tax rate.

They claim they had not paid tax so they should not get a refund.

Again they are wrong.

Clearly they have paid tax.

The Company has effectively deducted 30% tax from their dividends and under current laws, if their personal tax rate is less than 30% tax, then the company has taken too much tax from their dividends and therefore should pay this back to the shareholder.

This is no different to tax being withheld from someone’s wages and sent to the ATO. If the wrong tax was deducted then the ATO would refund this when a tax return is lodged at year end.

The Labor government is proposing that they will confiscate this money and not give it back to the shareholder thus effectively taxing them at 30%.

It’s totally unfair that they penalise these people with a 30% tax rate when they are below this rate.

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4 responses to “The loss of refunds from franked dividends by Ed Chan”

  1. Sergey Golovin says:

    Hi Ed,

    Thank you, valid point.
    Not that I like it, but…

    If Australian government to slash companies tax rate down say to same level as US one to 21%, Labour might get away with their proposal when they start trading horses on floor of the parliament.

    The only thing to watch for at that time is to make sure that they don’t make a law to substruct that difference, however small that would be, say difference between 21% and 20% or 19%. They will never give you more, difference between 21% and 25%, but they will be quick to snatch that 2-3% difference between 21 and 19%

    Regards

    Sergey Golovin

    • Chan & Naylor says:

      Thank you for commenting Sergey
      The inequity becomes even worst if you take SMSF’s into account
      Many retirees who have SMSF’s are not rich and because they are in pension mode their SMSF’s do not pay tax.
      In this scenario they will lose all their Franking Credits should Labor get elected and their hair brain idea passes the senate.
      With the Liberals recent changes to SMSF limiting tax free pensions to under a cap of $1.6 million this has been a double punishment

  2. Christine Samuels says:

    Hi Ed,

    Even people who don’t pay income taxes pay tax. Every time you buy petrol, alcohol, cigarettes etc. etc. in this country you pay excessive taxes, so everyone deserves a tax refund.

    • Chan & Naylor says:

      Hi Christine
      Well said. That’s in addition to income tax so it makes it doubly wrong.
      Not sure how many people understand this. Even if they are not in this position right now but they maybe in the future. So it will eventually hurt them.
      The media has not picked up on this fact.

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