Advice please

[Ext User(Ian)]

"John Machin" <sjmachin@lexicon.net> wrote in message
news:43dfeb05$1@news.eftel.com...
>
> Dividends are tax-free? I must have fallen asleep for years like Rip van
> Winkle. It used to be the case that you would pay income tax on the
> grossed-up dividend, and get a rebate equal to the franking credits --
> what's the go now?

If your shares are held by a private company, and the dividend is fully
franked, then the dividends are effectively tax-free.

-- Ian

[Ext User(Lionel)]

Ian wrote:
> "John Machin" <sjmachin@lexicon.net> wrote in message
> news:43dfeb05$1@news.eftel.com...
>> Dividends are tax-free? I must have fallen asleep for years like Rip van
>> Winkle. It used to be the case that you would pay income tax on the
>> grossed-up dividend, and get a rebate equal to the franking credits --
>> what's the go now?
>
> If your shares are held by a private company, and the dividend is fully
> franked, then the dividends are effectively tax-free.

Put yourself on the 48.5% tax bracket and come back and tell us all that.

Lionel.

[Ext User(John Wright)]

"Ian" wrote in message
> If your shares are held by a private company, and the dividend is fully
> franked, then the dividends are effectively tax-free.

I am sure we all understand the imputation system very well. When a company
wants to give out 100 cents a share as dividend, ATO requires it to first
dispatch to it 30 cents as advance tax - in case the shareholder somehow
forgets to include this income in his next tax return. Some shareholders may
be on a much lower marginal tax rate - no worries to ATO. ATO gives it a
nice name - franking credit. The cheque from the company to the shareholder
is then only 70 cents a share; the onus is on him to recover the 30 cents
paid to ATO. But what is the true dividend? It is not 70 cents, it is 100
cents. On this 100 cents everyone pays tax at whatever his marginal tax rate
is when everything is resolved eventually; withholding of the franking
credit is only a timing and cashflow issue. To say dividend is 70 cents and
is taxfree for a company shareholder paying 30% tax is quite incorrect. Then
a super fund paying allocated pension could say their dividend has a
negative 42.9% tax! A lot of organisations, advisors and others propagate
this taxfree view because it suits them and makes the client feel warm.

Regards - JW

[Ext User(Ian)]

Hence the use of the word "effectively".

"John Wright" <notprovided@something.com> wrote in message
news:43e142a4$0$22328$afc38c87@news.optusnet.com.a u...
> "Ian" wrote in message
> > If your shares are held by a private company, and the dividend is fully
> > franked, then the dividends are effectively tax-free.
>
> I am sure we all understand the imputation system very well. When a
company
> wants to give out 100 cents a share as dividend, ATO requires it to first
> dispatch to it 30 cents as advance tax - in case the shareholder somehow
> forgets to include this income in his next tax return. Some shareholders
may
> be on a much lower marginal tax rate - no worries to ATO. ATO gives it a
> nice name - franking credit. The cheque from the company to the
shareholder
> is then only 70 cents a share; the onus is on him to recover the 30 cents
> paid to ATO. But what is the true dividend? It is not 70 cents, it is 100
> cents. On this 100 cents everyone pays tax at whatever his marginal tax
rate
> is when everything is resolved eventually; withholding of the franking
> credit is only a timing and cashflow issue. To say dividend is 70 cents
and
> is taxfree for a company shareholder paying 30% tax is quite incorrect.
Then
> a super fund paying allocated pension could say their dividend has a
> negative 42.9% tax! A lot of organisations, advisors and others propagate
> this taxfree view because it suits them and makes the client feel warm.
>
> Regards - JW
>
>
>
>
>
>
>

[Ext User(Ian)]

"Lionel" <lionelv_@gmail.com> wrote in message
news:drrdcr$2kqu$1@bunyip2.cc.uq.edu.au...
> Ian wrote:
> > "John Machin" <sjmachin@lexicon.net> wrote in message
> > news:43dfeb05$1@news.eftel.com...
> >> Dividends are tax-free? I must have fallen asleep for years like Rip
van
> >> Winkle. It used to be the case that you would pay income tax on the
> >> grossed-up dividend, and get a rebate equal to the franking credits --
> >> what's the go now?
> >
> > If your shares are held by a private company, and the dividend is fully
> > franked, then the dividends are effectively tax-free.
>
> Put yourself on the 48.5% tax bracket and come back and tell us all that.
>

Done.

[Ext User(Lionel)]

Ian wrote:
> "Lionel" <lionelv_@gmail.com> wrote in message
> news:drrdcr$2kqu$1@bunyip2.cc.uq.edu.au...
>> Ian wrote:
>>> "John Machin" <sjmachin@lexicon.net> wrote in message
>>> news:43dfeb05$1@news.eftel.com...
>>>> Dividends are tax-free? I must have fallen asleep for years like Rip
> van
>>>> Winkle. It used to be the case that you would pay income tax on the
>>>> grossed-up dividend, and get a rebate equal to the franking credits --
>>>> what's the go now?
>>> If your shares are held by a private company, and the dividend is fully
>>> franked, then the dividends are effectively tax-free.
>> Put yourself on the 48.5% tax bracket and come back and tell us all that.
>>
>
> Done.

So you found that you still had to pay some tax?

[Ext User(Ian)]

"Lionel" <lionelv_@gmail.com> wrote in message
news:drrmvl$oq8$1@bunyip2.cc.uq.edu.au...
> Ian wrote:
> > "Lionel" <lionelv_@gmail.com> wrote in message
> > news:drrdcr$2kqu$1@bunyip2.cc.uq.edu.au...
> >> Ian wrote:
> >>> "John Machin" <sjmachin@lexicon.net> wrote in message
> >>> news:43dfeb05$1@news.eftel.com...
> >>>> Dividends are tax-free? I must have fallen asleep for years like Rip
> > van
> >>>> Winkle. It used to be the case that you would pay income tax on the
> >>>> grossed-up dividend, and get a rebate equal to the franking
credits --
> >>>> what's the go now?
> >>> If your shares are held by a private company, and the dividend is
fully
> >>> franked, then the dividends are effectively tax-free.
> >> Put yourself on the 48.5% tax bracket and come back and tell us all
that.
> >>
> >
> > Done.
>
> So you found that you still had to pay some tax?

Nope - if the shares are owned by a company, then no additional tax is due
when the company receives a fully franked dividend.

Eg, say a private company called Ian's Investment Company (IIC) owns 10,000
shares in CBA. CBA pays fully franked dividend $19,700. Franking credit
covers IIC's tax liability so no additional tax is payable. IIC gets to
compound its investments at 30% tax rate instead of 48.5%.

Downside, of course, is that shares you hold personally get better CGT
treatment, so if you sell your BHP shares you only pay 24.25% tax on the
gain, whereas IIC will pay 30%.

OTOH, IIC gets the benefit of compounding its dividends at a lower tax rate,
and if you're planning to hang on for a while, the projected difference
narrows substantially.

Of course, if you're planning to buy&hold, then the CGT is something that
may never happen anyway.

Finally, its entirely possible the personal CGT discount may disappear one
day, politicians being what they are.

I try to put my high-yield "keepers" under company ownership, and my
speculatives under personal ownership.

-- Ian

[Ext User(Lionel)]

Ian wrote:
> Nope - if the shares are owned by a company, then no additional tax is due
> when the company receives a fully franked dividend.

Sorry, I had no idea at this point that you were talking about a private
company owning YOUR shares, I mis-read your initial post!

For most people it would be of no benefit investing via a private
company, in fact my sister who is also an accountant has had a number of
clients who have done exactly this (I don't think they restricted
themselves to shares), in most cases she said they were coming out worse
off after paying all the expenses associated with running the private
company. I'm not sure what the expenses are, but I imagine it requires
more accountant intervention for a start, perhaps BAS's etc.????

Lionel.

[Ext User(Ian)]

"Lionel" <lionelv_@gmail.com> wrote in message
news:drruq2$bp6$1@bunyip2.cc.uq.edu.au...
>
> For most people it would be of no benefit investing via a private
> company, in fact my sister who is also an accountant has had a number of
> clients who have done exactly this (I don't think they restricted
> themselves to shares), in most cases she said they were coming out worse
> off after paying all the expenses associated with running the private
> company. I'm not sure what the expenses are, but I imagine it requires
> more accountant intervention for a start, perhaps BAS's etc.????
>
> Lionel.

For me, the company exists anyway, so it was an easy option. Also, it's the
generator of additional investment income, so rather than pull profits out
of the company and pay additional tax, it seems to make sense to leave them
in, have more to invest and have it compound at a lower tax rate. Yeah,
there's probably a couple of grand in annual costs.

-- Ian

[Ext User(John Wright)]

"Ian" wrote
> ... if the shares are owned by a company, then no additional tax is due
> when the company receives a fully franked dividend.
>
> Eg, say a private company called Ian's Investment Company (IIC) owns
> 10,000
> shares in CBA. CBA pays fully franked dividend $19,700. Franking credit
> covers IIC's tax liability so no additional tax is payable. IIC gets to
> compound its investments at 30% tax rate instead of 48.5%.
>

This is quite correct. However, one little bit needs to be added to complete
the story. You will presumably take some of these dividends out from your
company to enjoy these earnings. They will then be taxed at your marginal
personal tax rate, less the franking credit from your company - so that's
another 48.5 - 30 = 18.5% for a top tax bracket taxpayer.

Regards - JW

[Ext User(Ian)]

"John Wright" <notprovided@something.com> wrote in message
news:43e1a611$0$10672$afc38c87@news.optusnet.com.a u...
>
> This is quite correct. However, one little bit needs to be added to
complete
> the story. You will presumably take some of these dividends out from your
> company to enjoy these earnings. They will then be taxed at your marginal
> personal tax rate, less the franking credit from your company - so that's
> another 48.5 - 30 = 18.5% for a top tax bracket taxpayer.
>
> Regards - JW
>
>

That's right John, but the idea is that you leave the dividends in your
investment company, as much as possible.

What you leave in gets to compound at 30% tax. You only take out what you
need to buy your socks, undies and beer each week. With the new tax scales,
you don't pay personal tax at more than 30% (average) until $87k, which
covers a reasonable quantity of the abovementioned three items.

But you're right, and its a worthwhile caveat - for example, if you pay
yourself a big dividend from your private company, for example, to buy a
house - say $1m. End of the year, and you owe the taxman $185k, which of
course you haven't got because you just bought a house and the private
company is your cashbox. So you pay yourself a $185k dividend to cover the
tax. So the following year, you owe the taxman another $34k (which of
course, you haven't got, etc).

To make matters worse, right after you pay the $185k, the taxman will start
slugging you instalments as though you're gonna owe him another $185k the
next year, and if you pay yourself dividends to cover those installments,
you'll owe him $68 the next year. The solution, obviously, is to vary your
tax installments down so the second year is only $34k and not $185k. But
this needs great caution, because if you vary it down and then, for some
other reason, end up with substantially greater personal income than you had
expected, the Taxman will (to paraphrase Rik from The Young Ones), cut off
your bottoms with a carving knife.

-- Ian

[Ext User(DocN)]

Ian wrote:
> "John Wright" <notprovided@something.com> wrote in message
> news:43e1a611$0$10672$afc38c87@news.optusnet.com.a u...
>
>>This is quite correct. However, one little bit needs to be added to
>
> complete
>
>>the story. You will presumably take some of these dividends out from your
>>company to enjoy these earnings. They will then be taxed at your marginal
>>personal tax rate, less the franking credit from your company - so that's
>>another 48.5 - 30 = 18.5% for a top tax bracket taxpayer.
>>
>>Regards - JW
>>
>>
>
>
> That's right John, but the idea is that you leave the dividends in your
> investment company, as much as possible.
>
> What you leave in gets to compound at 30% tax. You only take out what you
> need to buy your socks, undies and beer each week. With the new tax scales,
> you don't pay personal tax at more than 30% (average) until $87k, which
> covers a reasonable quantity of the abovementioned three items.
>
>
Thats correct if you take out the profits as dividends. However if the
company was set up with a good capital base (not a $2 company)you can
take money out as a capital repayment and this does not attract any
tax.You can continue doing this as long as the capital base of the
company is positive.

Neil

[Ext User(Peter Sutton)]

On Fri, 3 Feb 2006 09:27:21 +1100, "Ian" <waimate01@telstra.com>
wrote:

>
>"John Wright" <notprovided@something.com> wrote in message
>news:43e1a611$0$10672$afc38c87@news.optusnet.com.a u...
>>
>> This is quite correct. However, one little bit needs to be added to
>complete
>> the story. You will presumably take some of these dividends out from your
>> company to enjoy these earnings. They will then be taxed at your marginal
>> personal tax rate, less the franking credit from your company - so that's
>> another 48.5 - 30 = 18.5% for a top tax bracket taxpayer.
>>
>> Regards - JW
>>
>>
>
>That's right John, but the idea is that you leave the dividends in your
>investment company, as much as possible.
>
>What you leave in gets to compound at 30% tax. You only take out what you
>need to buy your socks, undies and beer each week. With the new tax scales,
>you don't pay personal tax at more than 30% (average) until $87k, which
>covers a reasonable quantity of the abovementioned three items.
>
>But you're right, and its a worthwhile caveat - for example, if you pay
>yourself a big dividend from your private company, for example, to buy a
>house - say $1m. End of the year, and you owe the taxman $185k, which of
>course you haven't got because you just bought a house and the private
>company is your cashbox. So you pay yourself a $185k dividend to cover the
>tax.

That's if the company has the money left over after paying 30% tax on
the total capital gain after selling the shares to pay the big
dividend. Alternatively, had the shares been in held in the
individual's name, and if the individual was on 30% marginal tax, the
capital gains tax would have been 15% (ie 30% on half the gain).

>So the following year, you owe the taxman another $34k (which of
>course, you haven't got, etc).
>
>To make matters worse, right after you pay the $185k, the taxman will start
>slugging you instalments as though you're gonna owe him another $185k the
>next year, and if you pay yourself dividends to cover those installments,
>you'll owe him $68 the next year. The solution, obviously, is to vary your
>tax installments down so the second year is only $34k and not $185k. But
>this needs great caution, because if you vary it down and then, for some
>other reason, end up with substantially greater personal income than you had
>expected, the Taxman will (to paraphrase Rik from The Young Ones), cut off
>your bottoms with a carving knife.
>
>-- Ian
>

[Ext User(John Machin)]

Ian wrote:
> Hence the use of the word "effectively".


"Effectively" is a weasel word. John Wright is quite correct. The
dividends are only tax-free to an entity with a zero rate of tax.

A related bit of bulldust put out by clueless wallies is that in a super
fund, the franking credits can "shelter" the employer contributions from
the 15% fund income tax.


>
> "John Wright" <notprovided@something.com> wrote in message
> news:43e142a4$0$22328$afc38c87@news.optusnet.com.a u...
>
>>"Ian" wrote in message
>>
>>>If your shares are held by a private company, and the dividend is fully
>>>franked, then the dividends are effectively tax-free.
>>
>>I am sure we all understand the imputation system very well. When a
>
> company
>
>>wants to give out 100 cents a share as dividend, ATO requires it to first
>>dispatch to it 30 cents as advance tax - in case the shareholder somehow
>>forgets to include this income in his next tax return. Some shareholders
>
> may
>
>>be on a much lower marginal tax rate - no worries to ATO. ATO gives it a
>>nice name - franking credit. The cheque from the company to the
>
> shareholder
>
>>is then only 70 cents a share; the onus is on him to recover the 30 cents
>>paid to ATO. But what is the true dividend? It is not 70 cents, it is 100
>>cents. On this 100 cents everyone pays tax at whatever his marginal tax
>
> rate
>
>>is when everything is resolved eventually; withholding of the franking
>>credit is only a timing and cashflow issue. To say dividend is 70 cents
>
> and
>
>>is taxfree for a company shareholder paying 30% tax is quite incorrect.
>
> Then
>
>>a super fund paying allocated pension could say their dividend has a
>>negative 42.9% tax! A lot of organisations, advisors and others propagate
>>this taxfree view because it suits them and makes the client feel warm.
>>
>>Regards - JW

[Ext User(John Machin)]

Ian wrote:
[snip]
>
> But you're right, and its a worthwhile caveat - for example, if you pay
> yourself a big dividend from your private company, for example, to buy a
> house - say $1m. End of the year, and you owe the taxman $185k, which of
> course you haven't got because you just bought a house and the private
> company is your cashbox. So you pay yourself a $185k dividend to cover the
> tax. So the following year, you owe the taxman another $34k (which of
> course, you haven't got, etc).
>
> To make matters worse, right after you pay the $185k, the taxman will start
> slugging you instalments as though you're gonna owe him another $185k the
> next year, and if you pay yourself dividends to cover those installments,
> you'll owe him $68 the next year. The solution, obviously, is to vary your
> tax installments down so the second year is only $34k and not $185k. But
> this needs great caution, because if you vary it down and then, for some
> other reason, end up with substantially greater personal income than you had
> expected, the Taxman will (to paraphrase Rik from The Young Ones), cut off
> your bottoms with a carving knife.
>

So instead of that, what's wrong with a Div 7A loan? No big dividends,
they can be spread over 25 years; interest on the loan goes back to your
cash box, not to the bank.

[Ext User(Ian)]

"John Machin" <sjmachin@lexicon.net> wrote in message
news:43e33e45$1@news.eftel.com...
>
> So instead of that, what's wrong with a Div 7A loan? No big dividends,
> they can be spread over 25 years; interest on the loan goes back to your
> cash box, not to the bank.

Yep, 25 for a house, 7 otherwise. Seems to me the efficacy of it depends on
your personal tax rate and how the arbitrage of tax rates works out
(assuming your personal income comes from the company, and so the loan
repayments end up being a round trip).

[Ext User(pedigree@mail.com)]

We have paid off our home loan by way of a 'family loan' (parents)
which will save us a lot in interest. It will take around 4 years to
pay them off at the rate we are now. We only have one wage coming in
now due to the new baby in the house. My question is I have some shares
(cba) that could pay off the rest of the loan now and then we would be
completely debt free albiet a interest free family loan but 25% of my
takehome wage each week.
Is it better to keep the shares or start again and use that 25% of my
wage in another way or keep the shares and bide our time?

[Ext User(Tonen)]

Irrespective of your loan, you sound to be exposed to far too much
market risk by holding a large position in just one stock.

Capital gains tax will need to be thought about, but presuming it's not
too onorous I'd suggest liquidating the portfolio. You sound to have a
great and trusting family relationship - maybe paying out the loan as a
gesture of appreciation of the trust your parents have placed in you is
preferable to reinvestment.

If CGT is a major issue, maybe even explore with them a "gentleman's
agreement" that the shares are theirs (though remaining in your hands)
in lieue of the loan. This may however get more complicated than it's
worth in sorting out how to deal with dividends/ tax credits, and the
ultimate CGT liability if/ when they ever need to cash "their" shares
in.

Then save 6 months living expenses kept in something like an internet
cash account with a decent interest rate. Then and only then, start
building your portfolio with something low cost and more diversified -
preferably top up Superannuation via your industry Super fund, or if
you want to keep it outside Super, via an Index managed fund product.

Main trick is to immediately divert the freed up cash flow from the
loan repayments to savings without letting them ever hit your wallet. A
taste of the increased disposable income for a "brief" period can
derail the best intentions of savers.

[Ext User(Peter Sutton)]

On 28 Jan 2006 15:51:49 -0800, pedigree@mail.com wrote:

>We have paid off our home loan by way of a 'family loan' (parents)
>which will save us a lot in interest. It will take around 4 years to
>pay them off at the rate we are now. We only have one wage coming in
>now due to the new baby in the house. My question is I have some shares
>(cba) that could pay off the rest of the loan now and then we would be
>completely debt free albiet a interest free family loan but 25% of my
>takehome wage each week.
>Is it better to keep the shares or start again and use that 25% of my
>wage in another way or keep the shares and bide our time?

I would be thinking of the capital gains tax I'd be paying on the sale
of the shares, the loss of dividends over the next 4 years, the
forgone increase in capital value of the shares over the next 4 years
and whether I would have the discipline not to spend the spare take
home pay on other non investment things, and I nearly forgot, the
brokerage incurred in selling/buying.

I'd probably not sell the shares, if I was in your situation. But
then I'm not.

[Ext User(savgoose)]

FINANCIALLY YOU'RE BETTER OFF RETAINING THE INterest free loan, morally you
would be better paying off the family loan, its your call, id keep the
interest free loan and my CBA stock.


<pedigree@mail.com> wrote in message
news:1138492309.088423.86870@g14g2000cwa.googlegro ups.com...
> We have paid off our home loan by way of a 'family loan' (parents)
> which will save us a lot in interest. It will take around 4 years to
> pay them off at the rate we are now. We only have one wage coming in
> now due to the new baby in the house. My question is I have some shares
> (cba) that could pay off the rest of the loan now and then we would be
> completely debt free albiet a interest free family loan but 25% of my
> takehome wage each week.
> Is it better to keep the shares or start again and use that 25% of my
> wage in another way or keep the shares and bide our time?
>