By Jimmy B Prince, author of Tax for Australians for Dummies

This article has been written in response to the many follow-up questions that were asked following my previous article ‘How to declare dividends and franking credits on your tax return.’

In my book ‘Tax for Australians for Dummies’ (2009 Wiley Publishing Australia) I point out at the end of the financial year, Australian residents are required to disclose the ‘taxable income’ they derive from all sources in or out of Australia. Under Australian income tax law ‘taxable income’ is defined as assessable income less allowable deductions. Assessable income is normally a mix of the following receipts namely, your salary and wages, business profits and investment income such as interest, rent, dividends and dividend franking credits.

Tax is levied on your taxable income on a progressive basis referred to as marginal tax rates, which can vary from between 0 per cent and 45 per cent (see Table 1 below). This means the more taxable income you earn the more tax you’re liable to pay. In addition to paying income tax, you may be liable to pay a 1.5 per cent Medicare levy if your taxable income is above a certain threshold. For the year ended 30 June 2009 the threshold for an individual is $17,794.

Claiming a tax offset

The amount of tax you’re liable to pay is reduced by tax credits such as pay-as-you-go (PAYG) withholding tax on salary and wages you derive, plus certain domestic tax offsets (rebates) that you may be entitled to claim (for instance dividend franking credits). The main tax offsets you are likely to come across are listed below:

•    Dependent tax offset,

•    Dividend franking credit tax offset;

•    Low income tax offset. The amount is $1,200 if your taxable income is below $30,000 for the 2008-09 financial year (and $1,350 for the 2009-10 financial year),

•    Mature age tax offset – maximum $500,

•    Medical expense tax offset,

•    Private health insurance tax offset,

•    Senior Australians tax offset,

•    Superannuation pension tax offset (15 per cent) if you’re between 55 and 59 years of age and in receipt of a superannuation pension.

If your total tax credits exceed the net tax payable, the Australian Tax Office (ATO) will ordinarily refund the net excess back to you. However, if your tax bill is more than your total tax credits you will have to pay additional tax on the shortfall. Unfortunately, the majority of the tax offsets mentioned above cannot be actually refunded back to you, as they can only be used to reduce your tax liability. The two notable exceptions being the private health insurance tax offset and the dividend franking credit tax offset. When the ATO calculates your net tax liability, they will first deduct any non-refundable tax offsets you can claim from your tax bill. This is done to ensure you’ll get the maximum refund of any unused dividend franking credits, and any excess PAYG withholding tax you may have paid.

By the way, if you receive dividend franking credits and you’re not required to lodge a tax return (for instance you are single, 65 years of age and deriving less than $28,867 in 2008-09), the ATO will refund the entire amount back to you. To get this refund you’ll need to prepare the form ‘application for refund of imputation credits for individuals’, or you can contact the ATO directly.

Deriving a superannuation pension

If you happen to be 60 year of age and getting a pension from a complying superannuation fund, the entire pension is tax-free and excluded from your assessable income. The good news here is the earnings generated to fund your pension payments are also exempt from tax. Thus, if your superannuation pension fund were to derive dividend franking credits, the ATO will refund the entire amount back into your pension fund and the return on your investment will increase. The following case study explains how this works.

Beverly Fisher, who is 60 years of age and retired, has set up a pension scheme within her self-managed-superannuation fund. She has a $600,000 share portfolio yielding 5 per cent dividends ‘fully franked’ to fund her pension payments. During the year ended 30 June 2009 the pension fund received $30,000 dividends ‘fully franked’ ($600,000 x 5% = $30,000), and the dividend franking credits were $12,857 ($30,000 x 30/70 = $12,857). As the pension fund is exempt from tax, the ATO will refund the $12,857 dividend franking credits back into the pension fund, and the overall return on her investment will increase to $42,857 ($30,000 + $12857 = $42,857). When this happens the dividend yield will effectively increase to 7.14 per cent ($42,857 / $600,000 x 100 = 7.14%). This means Beverly has the capacity to withdraw a $42,857 tax-free pension without the need to sell any of her shares (you little ripper!).

Australian tax rates

Individual Resident (2008-09)

Taxable income    Marginal tax rates (%)

$0-$6,000                  0

$6,001-$34,000         15

$34,001-$80,000       30

$80,001-$180,000     40

Over $180,000           45

Individual Resident (2009-10)

Taxable income    Marginal tax rates (%)

$0 to $6000                  0

$6,001-$35,000           15

$35,001-$80,000         30

$80,001-$180,000       38

Over $180,000             45


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