Written by Professor Bob Deutsch, CTA, Senior Tax Counsel
The interplay of the denial of excess franking credits with other taxes, levies, and benefits has been largely overlooked in the current debate.
That interplay could be critical whenever a calculation of the tax, levy or benefit depends on a calculation of “taxable income” which includes a franked dividend.
Let me explain by way of a simple example. A single retiree, Anna, has income consisting solely of a franked dividend of $20,000, franked at 30%.
Anna must include in her assessable income an amount of $28,571 (ie $20,000 + $20,000 x 3/7). As she has no deductions, her taxable income is also $28,571.
The gross tax based on 2017/8 marginal rates is $1970. Under Labor’s plan to deny excess franking credits the $8,571 is offset against the gross tax of $1,970 such that the net tax payable is reduced to zero. However, the excess of $6,601 currently refundable, will under Labor’s plan, be no longer refundable.
All that has been reasonably well understood. What has not been is that even though the $6,601 will no longer be refunded under the Labor plan, the Medicare levy will continue to be calculated on the full taxable income of $28,571 rather than the lesser amount of $21,970 (being $28,571 minus $6,601). The Medicare Levy would then be 2% of $28,571 or $570 as opposed to a Medicare Levy of $0 if based on taxable income of $21,970. That’s because the Medicare Levy for a single person not receiving the Senior Australian Pensioner Tax Offset (SAPTO) is 2% of total taxable income if taxable income exceeds $27,476 but is NIL if taxable income is less than $21,980.
The table following this article spells this out in more detail.
Other areas where all this might matter include the Private Health Care Rebate and the entitlement to the Commonwealth Seniors Health Card.
It has no relevance to the age pension as shares are classed as financial assets and subject to a deeming rate irrespective of actual taxable income.
|$20,000 franked dividend v $28,571 salary|
|Now FD||Now + under ALP salary||Under ALP FD|
|Prof Bob Deutsch, CTA|
*In both cases the Medicare Levy is too high as it is levied at 2% of taxable income even though the tax payer does not get the full benefit of the taxable income due to ALP’s refund denial. By reverse engineering the numbers, for a net $70,000 after tax return, the taxable income should be around $91,300 which means the Medicare levy should be around $1,826 not $2,000.
For a net $20,000 after tax return, the taxable income should be around $20,400 which means the Medicare Levy should be NIL as the Medicare Levy is Nil for taxable income less than $21,980. As it is calculated on $28,571 it is 2$ of the lot as the taxable income exceeds the designated number being $27,476.