Tax with Max: Calculating franked dividend gross-up values

Franked dividend gross-up values, CGT, and more.

Summary: This article provides answers on calculating franked dividend gross-up values, the capital gains tax liability on an investment property, study tips for managing financial affairs, and the payment frequency requirements for superannuation pensions.
Key take-out: The gross-up of a fully franked dividend is not dependent on the tax bracket of the person who receives a dividend. However, the tax paid by an individual will depend on their marginal tax rate.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Calculating franked dividend gross-up values

I am wanting to know the franking gross-up values for someone in 15% and 30% tax brackets, and whether my overall cash position is better off in a lower rate.

Answer: The gross-up of a fully franked dividend is not dependent on the tax bracket of the person who receives a dividend. Where a fully franked dividend is received the fully franked dividend received is grossed up by the imputation credit received.

For example, if a person receives a $700 fully franked dividend, and if the current company tax rate of 30% still applies, that would come with a $300 imputation credit. This person would need to include both the $700 and $300 in their tax return. They can either get a refund or pay extra tax depending on their applicable marginal tax rate.

The marginal tax rates applying to individuals changed several years ago. The lowest marginal tax rate, including the Medicare levy, is now 20.5% and the next marginal tax rate is 34%. In the example of the $700 fully franked dividend a person on the lowest marginal tax rate would receive a refund of $95, while a person on the higher marginal tax rate would pay extra tax of $40.

Capital gains tax liability on an investment property

I just bought an investment property for $600,000. In about five years’ time, when the market value has increased to $700,000, my wife and I plan to sell our current home and move into this apartment. If, in 10 years’ time, I decide to live overseas and sell this property, would I have to pay any capital gains tax?

According to my financial adviser there is no tax payable because I am selling my own home. However, my accountant disagreed and said I have to pay tax on the capital gain of $100,000 for the first five years when it was an investment property. I am very confused and your comment would be much appreciated. In addition, if my daughter inherits this property and later sells it, what would be her CGT liability?

Answer: The advice given to you by your financial adviser is the very reason why greater controls are being introduced when it comes to financial advisers giving tax advice. Your accountant is right, and your adviser is wrong.

Where an asset has been used to produce income and then changes to being used for private purposes, such as a rental property converting to a residence, capital gains tax is payable when the property is sold. Your accountant is again right, based on the facts you presented, as you will pay capital gains tax on the $100,000 increase in value over the time it was rented.

This may not be a problem, however, if the sale occurs after you have ceased work, are receiving a tax-free pension from a superannuation fund, and have little or no other income. If the property had been bought jointly with your wife, this would result in $25,000 each of taxable gain from the sale. This would mean very little tax would be payable on the gain.

If your daughter inherited the property and then later sold it she would pay capital gains tax that would more than likely be made up of two amounts. The first would be the original $100,000 gain made in the first five years. There would also need to be a value placed on the apartment when she inherited it, as long as it had still been your home. She would then pay tax on the increase in the value of the property from the date she inherited it up until the date she sold it, unless she lived in it.

Study tips for managing financial affairs

I am 57 years-old and for the time being have pulled the plug on working (though I will probably return to the workforce down the track). I have the time and inclination to study and thought that studying in the financial or accounting fields may not be a bad idea in that it keeps the brain ticking over and may prove useful in managing my financial affairs.

Currently, I have a share portfolio, investment property, bank and term deposits split between myself, a managed super fund and private. I have not worked in the financial or business sector before. Given the above, am I better off studying accounting, or financial planning, or some other area?  My aims are essentially to maximise my returns from the above through improving my knowledge.  It’s not what I know that worries me; it’s what I don’t know. Any thoughts on areas of study for a would-be retiree?

Answer: I’m not sure whether you would get the benefit that you want from either of the two courses of study that you are contemplating. If you do the financial planning degree you will more than likely learn how to meet all of the legislative requirements to be giving advice, and prepare a statement of advice, but will not necessarily gain the detailed knowledge of investments that you are seeking.

If you did the accounting degree you will be able to keep a better track of your income and expenses, and know how income and expenses are treated for tax purposes, but again you will not necessarily gain a great detailed insight into investing.

There are many good books available on investment theory and portfolio construction that would be a good starting point for you. One that comes to mind is William J Bernstein’s book, “the four pillars of investing”.

Payment frequency requirements for superannuation pensions

There is a taxation ruling 2013/5 that states “a single payment for one year will not be an income stream”. For a SMSF, which has been in pension mode for some years, and the pensions have been paid as one payment in June of each year, does this ruling mean that the fund has not been complying with the SIS regulations?

If this is the case, does the requirement apply only since the ruling was released on July 31 this year? What is the least number of pension payments which may be made and still comply with SIS requirements, and are the amounts and timing of the payments important?

Answer: There have been several rulings issued this year by the ATO relating to superannuation pensions. In the main ruling the ATO sets out that for an income stream to qualify as a superannuation pension there needs to be a series of payments made. In the ruling, the ATO also states that a pension consisting of one annual lump sum payment a year would qualify as long as that pension is to be paid over a series of years.

This means your practice of taking one annual pension payment in June of each year, as long as it is part of a superannuation pension covering several years, will qualify as a superannuation pension. The ATO has also confirmed that in the event of a member dying before they receive their annual pension payment the super fund will still be regarded as being in pension phase.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

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