Tax Management. Can I reduce our marginal tax to >13% ?

Guys,

I have been running some numbers on tax with respect to individual income, joint income, individual capital gains, and joint capital gains.

To those of you with more knowledge on taxation can you advise if the following assumptions are correct. These points follow a story in an attempt to reduce my tax rate to 13% ... can this be done ? Please follow the through to the end.

1. If I were an individual earning a standard wage of $172,000 in one tax year with no capital gains (and no medicare tax for sake of argument) my after tax income would be $120,411. Marginal tax rate = $29.99%.

2. If my wife and I have no jobs and our only income is from dividends from joint share holdings (ignore franking credits for the moment) then a Gross Income of $154,000 would give us an after tax income of $120,701 . Marginal Rate (as a couple) = 21.62%.

So spreading the 'families' income between the two of us means we only have to earn $154K to get $120K net of tax per year rather than having to earn $172K as an individual (forgetting about the medicare tax and the dividend franking credits)

OK so far so good .... now can we go further and split the capital gains between my spouse and me (if we jointly own the asset sold) ? I believe that capital gains tax is totally separate from tax on income and although the tax bands are the same, ie. 6K, 37K, 80K etc. your tax rate for income is unrelated to your tax rate for capital gains so.

So in the first two examples total tax is lower if we split the income gains between two.

If one could manage ones dividend income (income gains) and manage ones capital gains in such away that both the dividend income is split between my spouse and me, and the capital gains are split between my spouse and me then theorhetically is the following possible ?

If Partner 1 gross income = $34,500, tax = $4,275, net gain after tax = $30,225.
If Partner 2 gross income = $34,500, tax = $4,275, net gain after tax = $30,225.
If Partner 1 capital gain = $34,500, tax = $4,275, net gain after tax = $30,225.
If Partner 2 capital gain = $34,500, tax = $4,275, net gain after tax = $30,225.

Thus income/capital gain of $138,000 will give an after tax income of $120,901, which is a marginal tax rate of 12.99%.

This example does not take in to account medicare tax, or dividend franking credits, or 50% discount for holding capital assets more than 1 year.

Are these numbers correct ? Can this be done ? I am just planning ahead with regards having dividend generating assets and capital assets of various sizes/types/maturities and looking at how one might be able to manage ones tax and trying to keep all taxable gains in the lowest tax bands available, ie 0% below $6,000 and 15% between $6,000 - $37,000.

Regards,
Gunnerguy.

 

Nope, sorry. You take your capital gain (discounted by 50% if held more than 12 months), and add it onto your other income. Total income is taxed together, not separately.

Also, I don't understand your logic wherein income from dividends is taxed less than income from a job. They are taxed at the same rate.

Finally, for this sort of exercise you cannot afford to ignore franking credits - they are an integral part of the calculation.

So, sadly, it doesn't work out as you suggest. You *can* however, split the dividend income between you and your spouse, as long as the shares are held in the appropriate name.

 

As soon as I hit the send button on that post I realised that income and capital gains are added to give total income for the year and taxed accordingly. I should know this !!

The reason I forgot is that in the next year of two I should be able to give up my day job and I am just trying to set up my assets to give me the best income with the lowest tax if possible. I have looked in to Trusts and SMSF and am still considering options. If in a couple of years I don't need the day job then I am trying to split ownership and thus income and capital gains between my wife and I.

Your comments on franking jrc77 are very interesting. I need to look in to this a little bit more. I also guess that the higher franking credit a dividend has the better for me.

Thanks for all your comments.

 

If you're on a 30% marginal rate, with a 30% franking credit you'll get your tax back.

However, if you had your own self managed super fund which was paying 15% tax, then a 30% franking credit would double your tax benefit.

On your income I'd be putting as much as possible in super. You can also make lump sum contributions and with that money you can buy shares.

Talk to your accountant and to a financial adviser

 

PJCA,

Can you clarify what you mean - I don't understand? In my example I was saying a hypothetically distribution of $160k (all dividends that were at 100% franking levels).

Regards,

Jason

 

just making point that in example the cash that would be received is $112k - guess it could be interpreted in example that $160k is being banked

 

Thats what I meant it to mean. My understanding is that if one individual received 80k of fully franked dividends they wouldn't pay any tax (if they had no other income). They would get the full 80k AND receive an extra $6k (approx) tax refund (as the franking credits are more than the tax they owe on the income). If my understanding is wrong someone please correct me

I am ignoring the medicare levy for this calculation, but shouldn't throw out the figures too much.

Regards,

Jason

 

if you receive a dividend of $80k that is fully franked the imputation credits attached to that dividend equate to $34,285, and your taxable income is $114,285

if you are working on an $80k taxable income figure you would receive $56k fully franked div and $24k franking credits.

the franking credits are not paid to shareholders, they are 'attached' to the dividend - but they are assessable

 

PJCA,

Thanks for that - I learn something new every day

Regards,

Jason