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

John: Our paymaster says we’ve got to get onto the “John Howard offset”. That’s the one that really pays out.

Peter: It’s the big one … it’s not like all the other offsets, this one is the only one you might be able to get in cash. 

Brenda: How do we get it Peter?

Peter: We need some shares.

In this, the second episode of The Kitchen Table series on franking credits, John and Brenda are sitting around the kitchen table with their son Peter. They are having a go at doing their tax on the dividend they received for their 100 shares in the Commonwealth Bank as well as the interest on their savings account with the bank.

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Brenda: Mrs Baker owns the shop where we make the sandwiches every day. She said she’s paying us $21,595 for 1000 hours work. Not a penny more. Not a minute more. She’s tough you know. She says it’s the maximum you can get without paying tax. Is that right Peter?

Peter: Yes Mum, that’s unless you’re getting some government money. The old age pension is $23,457 for people starting this year.

Brenda: Well, I won’t be on that for a long time, dear. Anyway, the sandwich shop is the only part time work I could get. Four hours a day. Five days a week – at $21.60 an hour, it’s okay. She says she’s paying more than I’d get under the award. It’s my “tax-free” she says. But she also says: if I get any other income, I’ll have to pay 19 per cent tax on it. Is that right?

Peter: Yes Mum. Those CBA dividends and CBA interest are going to get taxed. There are things called LITO and LAMITO. They’re “offsets” which will help you a bit. But Mrs Baker’s basically chewed them all up getting you your “tax-free” Mum. We’ll ignore the offsets, they’re rats and mice for you from here on.

Medicare has its own special maths, so I’m going to ignore it …

John: OK, enough of that. That’s your mother sorted. I’m on $80,000 a year at the coal mine. The paymaster is a genius. Every week he takes our tax out of our wages. We call him “Goldilocks” because he gets it just right. He says: if I get any other income, I’ll have to pay 32.5 per cent tax on it. What do you reckon son?

Peter: Yes Dad. Those CBA dividends and CBA interest are going to get taxed.  You’re on the LAMITO offset which is going to help you a bit, but it’s rats and mice and we’ll ignore it.

John: Not so fast, son. Obviously, you’ve been up all night on the internet, but our paymaster Goldilocks says we’ve got to get onto the “John Howard offset”. That’s the one that really pays out.

The Kitchen Table: a Franking Credits Revelation

Peter: Okay Dad, Mr Goldilocks is right: there is another one. It’s the big one. You use it to pay your tax. But it’s not like all the other offsets, this one is the only one I could find that you might be able to get in cash. That’s why you want it.

Brenda: How do we get it Peter?

Peter: We need some shares.

Brenda: You’re not talking about our franking credit money, are you? That money from the government that came with the CBA dividends?

Peter: That’s it. We’re going to use it to pay the tax on the CBA share money and we might be able to use it to pay the tax on your CBA interest too.

Brenda: But this money comes from the government Peter. We’re using government money to pay our tax? Isn’t it just going round in a circle? That can’t be right.

Peter: That’s not all, Mum. If there’s any left, after you’ve paid what you owe in tax, then you get to keep the bit that’s left over; in cash. Mr Howard organised the cash payout.

John: Can we just get on with this. Who’s getting the franking credit money Peter? Us? Or is the government taking it back?

Brenda: Your father and I both have 100 CBA shares. Worth around $70 each when share money was worked out. And both of us have $7000 on deposit with CBA. Each of us got $413 in dividends and $140 in interest. And I checked; it’s “100 per cent franked”, whatever that means.

Peter: Rule Number 1: What I’m going to say works when it says “100 per cent franked”. If it does, this is all you need to know for shares. Take your “marginal rate” and deduct 30 per cent. That’s Rule 1.

John: So, my marginal is 32.5 per cent. Okay. Take away 30 per cent, that leaves 2.5 per cent. Now what?

Peter: What happens is: the government gets all your franking credit money and you top up with 2.5 per cent tax. That’s it. You’re done for the tax on the shares.

John: That’s got to be nonsense son. The government gave us the franking credit money in the first place. Like your mother said, its going around in circles. I’ve heard of robbing Peter to pay Paul, but this is taking money from Peter to give back to Peter. Are you sure I only pay 2.5 per cent?

Peter: Yes Dad. And you’ve got to pay tax on the franking credit money too. I know it sounds weird, but …. Here’s the punchline: You owe 2.5 per cent on the $431 CBA dividend and 2.5 per cent on the $185 franking credit. That’s $15 all up. You got $431 from CBA and now you’ve got $416.

Brenda: Well done Dear! You’ve kept 96 per cent of what CBA paid you on your shares. What about me, Peter?

Peter: Well Mum, your marginal is 19 per cent. Take away 30 per cent and you get -11 per cent. That’s minus 11 per cent. That means you don’t pay tax on your shares. Not a brass razoo. Instead, the government gives you 11 per cent of the share money. It’s a sort of bonus. Put your hand out Mum!

Brenda: No! I’m not getting a government handout, dear. As my father always said …..

Peter: Well, we’re not done yet Mum. So far we’ve only worked out that you got $431 from CBA and now it’s gone up to $499. You still owe tax on your CBA interest.

So now for Rule 2: The government will only give you what’s left of your franking credits, when you’ve paid all your tax!

Brenda: Well, it’s their money dear. That sounds right. But are you saying that if I did not get interest from the bank, then we’d stop here? And the government would give me cash?

Peter: Yes Mum. If we’d stopped here, then you’d get $68 from the government. That’s 11 per cent on the $431 CBA dividend plus 11 per cent on the $185 franking credit. That’s $68 all up – cash in hand. And look: you’ve now got 115 per cent of the $431 that CBA paid you on your shares. That’s more than you got out of the letter box.

Brenda: Mrs Baker would be very interested in this. She was giving me my tax-free for working for her, but she said I’d pay 19 per cent on what came in after that. But the government pay me $68 instead. Weird stuff this tax business. No-one knows this at the sandwich shop.

John: Now son. Hurry up. Do the interest, your mother’s and mine.

Peter: Mum first. Your $7000 in the bank paid 2 per cent interest. That’s why you got $140 from CBA. Your marginal is 19 per cent. You don’t get government money for interest. You only get it for shares, remember? So, you pay full freight on the interest.

So, 19 per cent of $140 is $27. And that’s coming out of your $68 handout – they grab the tax you owe first – that’s what an “offset” means. But this is the “John Howard offset” remember – so you get what’s left over – you’re looking at $41 when all’s said and done. Mr Howard wants you to have it Mum.

Brenda: And I get to keep all the $140 interest too, plus I get Mr Howard’s $41 handout. I always said Mr Howard was a nice man. What about your father – is he on a handout too?

Peter: Okay Dad. So, you’re just like Mum but your marginal is 32.5 per cent. And you’ve used up all your franking credits paying tax on your shares. So not so good here. Tax at 32.5 per cent on $140 is $46. You’re out of pocket by $46.

John: So I have to send them $46? Plus the $15 I owe on the shares. $61?

Brenda: I could give you my $41 from Mr Howard dear.

Peter: I’d even give you the remaining $20 Dad.

John: Sounds like a nice result to me! I’m off to bed. Write it all down will you Peter. Nobody down at the mine is going to believe this.

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Hundreds of thousands of Australian get a 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.

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

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

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

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Episode 3: In the next episode, Peter writes down who gets what and from whom. John goes to speak to Mr Goldilocks at the pay office. And Brenda goes to have a chat with Mrs Baker. Meanwhile Brenda’s sister Susan opens her letterbox in Silicon Valley and finds a cheque from the CBA for her 100 shares.