John: Didn’t Kelly O’Dwyer put some sort of limit on how much you could end up with in your super fund?

Peter: Yes. She capped it at $1.6 million. From 1 July 2017.

John: $1.6 million? How many years is that going to take if you’re only allowed to put in $25,000 a year?

Peter: Sixty-four years Dad. Less, if you invest it well. And less if you can find some after-tax money.

Brenda: Otherwise, you have to start when you’re one year old … at $25,000 a year for 64 years … that’s $1.6 million exactly!

In this, the Third Episode of The Kitchen Table series on franking credits, Brenda and John are back, sitting around the kitchen table with their son Peter. They are discussing how much foreign shareholders get from their dividends, working out what workers on other marginal rates get, and having a look at putting franking credits into superannuation funds.

Peter writes up a league table, built on the 100 per cent franked dividend paid by CBA on 100 shares this financial year. They find it’s horses for courses. This is what everyone ended up with:

After Franking Credits – the dollars you get

Steve (45% marginal)$339
David (37% marginal)$388
John (32.5% marginal)$416
Susan (zero withholding tax)$431
CBA paid everyone:$431 dividend
Brenda (19% marginal):$499
Mr G's accumulating super (15% flat):$523
Penny's pension SMSF (zero tax):$616

The top three paid tax on their dividend. The foreigner paid no tax. The bottom three received franking credit money from the government.

To put this another way: depending on who you are, you can end up with between 78.6 per cent and 142.8 per cent of the CBA dividend in your pocket. It’s the same for every other 100 per cent franked share.

Or, if you’re into yields: you will find the pre-tax annual dividend yields for any listed share quoted live on the ASX website. CBA paid $4.31 per share this financial year, and on a last sale price of $70, the yield on the ASX website is 6.2 percent.

But it’s not pre-tax that counts. It’s after-tax yields that investing is all about. Especially if you’re investing in franking credits. Depending who you are, you’ll have a different after-tax yield on your $70 CBA share:

After Franking Credits – the yield you get

Steve (45% marginal):4.9%
David (37% marginal):5.5%
John (32.5% marginal):5.9%
Susan (zero withholding)6.2%
CBA paid everyone:6.2%
Brenda (19% marginal):7.1%
Mr G's accumulating super (15% flat):7.5%
Penny's pension SMSF (zero tax):8.8%

The table is based on a share price of $70 per CBA share. Once again, the top three paid tax on their dividends. The bottom three received franking credit money from the government, lifting their yields. And there’s only one place on the planet that you will see more than 6.2 per cent after tax on a CBA share – that’s Australia. That’s because in Australia, “after tax” means “thanks for all the franking credit cash”.

A moment on foreigners: The Commonwealth Bank’s website tells us foreigners make up around 20 per cent of the bank’s share register (since December 2013, it’s between 19.6 and 21.4 per cent). Most foreigners are quite content with a no-tax yield. Otherwise they would not be there in such numbers.

Enough of this: here is how Peter came up with his league table.
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Brenda: I have some news. My twin sister Susan rang from America. She’s just received her CBA dividend and CBA interest, but there’s some missing from her interest. And I also had a chat to Mrs Baker. Her whole family’s into super, for decades now, early adopters by the look of it.

John: Okay dear, let’s do Aunty Susan first.

Peter: Before we start. We’ve got to remember that you get $185 franking credits with your $431 CBA dividend. It’s always 42.8 per cent of the dividend – no matter which company you get the dividend from. So long as its 100 per cent franked.

Susan the foreigner

Brenda: Well Susan and I, we’re twins, so we always do the same thing, except that she married an American and moved to Silicon Valley. She’s now a US citizen, even gave up her Australian citizenship. We’ve both had CBA bank accounts since we were in infants’ school with $7000 in each of them. We both bought 100 CBA shares at the same time, now worth around $7000 at $70 a share.

John: So how much share money did Aunty Susan actually get from CBA?

Brenda: She was a bit surprised at what happened. She got the full $431 on the shares, but CBA kept 10 per cent out of her interest and sent it to the government. At least the government is getting some tax out of her CBA interest.

Peter: I’m putting her into my franking credit league table at $431, right in the middle.

The Kitchen Table: a Franking Credits Revelation

It’s a special rule for foreigners, Mum. They get a partial benefit from the franking credit system. If the dividend is 100 per cent fully franked, she gets the full dividend, no “withholding tax”. But if it’s not 100 per cent, the bank must keep 15 per cent of any unfranked part of her dividend and send it to the Australian government. CBA keeps 10 per cent withholding tax on interest it pays and sends it to the government.

John: How come this happens?

Peter: It’s in an agreement between the Australian and US governments. We have them with more than 40 countries; and lots of countries have them with lots of other countries. It’s a huge cobweb. They’re called the Double Tax Agreements (DTAs for short). They’re said to stop “double taxation”, but it’s a lot more subtle than that if you’re clever, they say.

John: Enough of this history, fascinating though it is. Looks like it’s taken this family nearly 20 years to get into Mr Howard’s nice little franking credit earner. Now I’m hearing about it on the news every day. Mr Bowen says this. Mr Frydenberg says that. Why didn’t someone tell us about it ages ago?

Peter: Dad, we’re out of the loop.

Some other wage earners

John: OK. Before we get onto Mum’s chat with Mrs Baker, can we do my brothers, David and Steve. Just the franking credit money. Leave their bank interest out of it for the moment.

David loads coal onto ships in Newcastle. He earns $130,000 plus compulsory super. Steve’s an engineer at the same place. He earns $200,000 plus compulsory super. And they each have 100 CBA shares.

Peter: Uncle David’s on a marginal rate of 37 per cent. And Uncle Steve’s on a marginal of 45 per cent. We’ll keep ignoring Medicare, like we did last time.

Applying Rule 1 to Uncle David: deduct 30 per cent from his marginal 37 per cent. That leaves him 7 percent to pay on both the dividend and on the franking credits. Remember both are taxed. That’s $43 tax on his share money, so he’s ended up with $388 out of the $431 CBA sent him.

I’m putting him into my league table at $388.

And applying Rule 1 to Uncle Steve this time: deduct 30 per cent from his marginal 45 per cent. That leaves him 15 percent to pay on both the dividend and the franking credits. That’s $92 tax on his share money. So, he’s ended up with $339 out of the $431 CBA sent him.

I’m putting him on my league table at $339. He ranks last. And he only gets a 4.9 per cent yield.

Brenda: Steve earns the most, so I suppose it’s right that he should pay the most tax and get the lowest yield. Okay, we’re done with this family. What did you learn about super John. We’ve all got some.

An accumulation fund

John: I told the paymaster at work, Mr Goldilocks, about what we were trying to do.

Goldilocks says he’s been onto franking credits for ten years now. Goldilocks usually gets things just right, so I asked him to explain it.

He says he has two super funds. His work fund, which he says is APRA-regulated. That’s where the 9.5 per cent compulsory employer super contributions go. And he has a second APRA-regulated fund – one with low fees and a good website that lets you buy shares in ASX 300 companies.

Brenda: That’s 300 companies listed on the stock exchange isn’t it?

John: Correct. Mr G says that the only thing holding him back is the limit on how much he can put into his super each year.

Brenda: What limit? There are so many rules here. How can anyone understand this?

Peter: It’s the “accumulation phase” limit. That’s the limit while you’re working. It’s a limit on how much you can put into super each year without getting into trouble. And you have to treat all your super funds as if they were one big fund, to work out if you’re under the limit. The Productivity Commission says that some people have so many funds, especially young people, they can’t even remember where the money is.

John: Mr Goldilocks said, just to make it complicated, there’s actually two limits in the accumulation phase. It’s because there are two ways to get extra money into super. Either you use before-tax money out of your salary, which they call “salary sacrifice”, or you can put in after-tax money out of your own pocket. That’s broadly it anyway. Before-tax is when you ask your boss to put in more than the compulsory 9.5 per cent. The company will reduce our salaries dollar-for-dollar if we salary sacrifice.

There are a couple of other before-tax things you can do, but the important thing to know is that there’s a $25,000 limit on the before-tax route.

Peter: There’s some maths here. The problem for Mr G is … he’s on a $147,000 salary and the 9.5 per cent compulsory eats up $14,000 out of the $25,000. And if he salary sacrifices the remaining $11,000 his fund loses $1,650 to the tax man, leaving him only enough for the 100 CBA shares. Its touch and go. But, as you say, he’s got it just about right.

John: I’m going to give up on this soon. It’s doing my head in. If the before-tax salary sacrifice is that complicated, let’s not even start on the after-tax route. I can see on your notes, Pete, that the after-tax limit is $100,000. We don’t have any after tax money to spare. Nothing like that anyway.

Peter: Moving forward: we can work out what’s happening to the CBA dividends going into Mr G’s APRA-regulated fund. While you’re working, super funds have a 15 per cent marginal tax rate.

Rule 1 again, just like we did for everyone else: deduct 30% from the fund’s marginal 15 per cent. That gives 15 per cent, but this time it’s a minus 15 per cent. That minus means government money is going into the fund. “Minus” means negative tax. Doing the maths there’s $92 coming in from the government, taking it to $523. That’s 122 per cent of the dividend. An after-tax yield of 7.5 per cent.

Even beats you Mum – a new winner!

I’m putting Mr G’s accumulation phase super into my league table at $523.

Mr Goldilocks puts 1000 CBA shares in his APRA-regulated fund

John: One more thing, before we leave Mr G. He says he’s been buying shares in his APRA-regulated super fund for 10 years. In the week leading up to Christmas, he gets on the internet and gets his fund to buy 100 CBA shares. After 10 years, he now has 1,000 in there. And each 100 has cost the fund between $5000 and $9000 over the years; more or less.

Brenda: So, this year his fund’s 1000 CBA shares gave him $4,310 in CBA dividends and $1,847 from the government in franking credits. He must be feeling pretty good about that.

John: But his 1000 CBA shares are only worth $70,000. I know that’s a lot. Didn’t Kelly O’Dwyer put some sort of limit on how much you could end up with in your super fund?

Peter: Yes. She capped it at $1.6 million. From 1 July 2017.

John: $1.6 million? How many years is that going to take if you’re only allowed to put in $25,000 a year?

Peter: Sixty-four years Dad. Less, if you invest it well. And less if you can find some after-tax money.

Brenda: Otherwise, you have to start when you’re one year old … at $25,000 a year for 64 years … that’s $1.6 million exactly!

How old is your Mr Goldilocks now, dear?

John: Same as us, dear: he’s 45.

Brenda: I don’t like his chances at getting to Ms O’Dwyer’s $1.6 million! He’ll be lucky to get half way. And at the rate we’re going … we’ve got Buckley’s John.

John: Let’s win the lottery, darling. Do lottery wins count as after-tax?

Peter: Yes, they do actually Dad. You can put in $100,000 each year from after-tax, so no need to win too big. And let’s not worry about Ms O’Dwyer and her limit. She reckons that limit saved the government about $6 billion.

We’ve got another example to do – Penny the super pensioner. Let’s do it next time. She’s already on my league table. Have a look if you like.

She’s in at $616. A clear winner – 142.8 per cent of the CBA dividend on 100 shares! At an after-tax yield of 8.8 per cent. Pretty good when the bank only pays 2 percent interest and you can lose almost half of that in tax, depending on who you are. Shares are more risky though.

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Sources:  ASX website, Australian Taxation Office website, Department of Human Services website, Productivity Commission website

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Next Episode: John wants to know: what happens if you don’t work? And how did Penny get so much into her super fund?


Editor’s note: Thousands of Australians get a cash payment from the government because they own shares. This is not a refund or a rebate. You can only get a refund if you have paid for something in the first place.

This is simply a payment. It is real money that you can use to pay your tax, or, if you’re lucky you can pocket it.

It is the Franking Credit Pension, a pension whose recipients dare not utter its name. For pensions are supposedly anathema to the self-funded retiree.

If you are a worker, like John and Brenda in our story, it all gets sorted out in your tax return. 

It’s complex. Don’t take our word for it. Ask a professional to sort it out for you.

NB. APRA-regulated funds may limit the amount you can put in one listed company’s shares. We’re ignoring this to help work though the complexity of franking credits game.

The Kitchen Table: the Quest for John Howard’s Cash Offset

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