When shareholders receive fully franked dividends, these amounts are rarely tax neutral. Depending on the individuals marginal tax rate, either a refund will be supplied or top-up tax will be required to be paid. For a fully franked dividend from a large company (at 30% fully franked), the top-up tax to an individual shareholder on the top margin rate is 24.3% of the cash value of the dividend. This represents the difference between the company tax rate, and the highest margin rate including the Medicare levy (i.e. 45% Tax plus 2% Medicare levy).
As the corporate tax rate for small businesses (with turnover of less than $50m) fell to 27.5%, the top-up tax rose from 24.3% to 26.9%. per dollar of cash received from a franked dividend remitted by these companies. In short a shareholder is required to contribute more in personal tax. Commencing for dividends paid in the 2020-2021 financial year, where the small business tax rate falls again to 26%, the top-up tax payable will again rise. It will now be 28.4% of the cash component of the dividend received.
The increased top-up tax maintains the same level of total tax as previously, thereby ensuring that tax paid on the dividend income is effectively 47%. This is particularly relevant to private company shareholders who use the payment of dividends as a means to manage their exposure to Division 7A. As the franking credit ratio decreases, the dividend required to satisfy Division 7A obligations increase and in turn this will result in higher top-up tax costs to the individuals.
While the Federal Government continues to support small companies by the reduction of the company tax rate, this does not extend to reducing the overall tax burden on small business owners, who are hit with increased top-up tax as they withdraw money from their business. This ‘sting in the tail’ is kept out of the promotion of lower rates but must be kept in mind for budgeting and tax planning for small business operators.
Should you require any further information on top up tax cost please contact our office and speak to either Noe, Oggy, Hayden, Michelle or Lucinda.
Date of Issue: 7 July 2020 Author: Noé Vicca
Disclaimer: The contents herein are intended for general information only and should not be construed as legal or accounting advice. Vicca Chartered Accountants Brisbane bears no responsibility for any loss that might occur from reliance on information contained in this publication. Please do not reproduce, transmit or distribute the contents herein in any form without prior permission from Vicca Chartered Accountants, Taxation Accountants Brisbane Australia.