What’s a Franking Credit? And how it affects us all

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In case you missed it, 2019 is an election year and one of the many battlegrounds being marked out by the parties is around the refund of “Franking Credits”. This term has been used extensively throughout the press, but I really wonder just how many of our journalists (and maybe politicians) could actually explain what a franking credit is.  But most importantly I’m pretty sure most of the voters couldn’t explain it so as someone who’s been in the tax industry for 30 years next week I think it needs to be explained for everyone. I’ll try to stay out of the politics here and just stick with the facts. Wish me luck!!!

So what actually is a franking credit??  At its most basic, a franking credit is a credit for tax that has been paid on a dividend received by an investor.  If we draw a parallel with your wages, the dividend you receive is like your weekly net wage and the franking credit is akin to the tax that has been withheld by your employer.  And just like wages when it comes to tax time you include the gross dividend in your tax return and claim a credit for the tax that has already been paid. 

So why was this system introduced?? This is a very relevant point. It was introduced by the labor government in 1986 to avoid double taxation on company dividends. Franking credits were initially a non-refundable credit which meant that investors didn’t receive tax refunds if their franking credits were more than their tax payable (more on this later). But then in 1997 the Howard government made franking credits fully refundable and investors started to receive cash refunds for their excess franking credits. Then in March last year the Labor party announced a policy to return to the original plan and remove the refundable nature of these credits.

This is where the current political debate kicks in – should the excess of franking credits be refunded to investors? I think to better understand this we need to take a deeper dive into the basis of franking credits, which is company tax. Companies pay tax at either 27.5% or 30% of their profits. Let’s assume that you are the sole shareholder of a company that makes $100 profit and pays 30% (i.e. $30) tax to the government, leaving $70 to be paid to you as a dividend. As mentioned in the previous paragraph you would include $100 in your tax return and claim a (franking) credit for the $30 tax that has been paid by the company. If your tax rate is less than 30% then you get a refund but if your tax rate is more than 30% you will need to pay extra.

So here’s the irony in the labor party’s policy – someone on a high taxable income with a marginal rate of above 30% actually receives the full benefit of the franking credit. But someone on a lower income would not receive the full benefit of the franking credit if they didn’t receive the refund.

I can hear you say “But Marty I’m not an investor so why should I give a flying??” Interestingly all superannuation funds in Australia pay tax at 15% (i.e. less than 30%) so if your superannuation proceeds are invested in Australian shares (either directly or through managed investments) then this change in legislation could affect you too. It’s not just self managed funds, this has an impact on all superannuation in the county.

So why make the change?? To balance the budget my friends. Labor’s estimates are that this will save Australian taxpayers $11.4 billion over four years, which is a substantial sum of money. It’s a cornerstone policy of theirs and much to their credit it was announced a long time ago and they are sticking tightly to it.

So here is what I see as the essential question of this debate – do you think company tax is a withholding tax or a final tax? If you see company tax as something that is paid to the government for shareholders to claim back in their tax returns, then the current policy of full refunds is for you. However if you think company tax is a final tax and that franking credits are simply there to remove the possibility of double taxation, then the labor policy is what you are after.

Personally I hope that we can have rigorous informed debate over this high level question, not ill-informed vested interest based complaining.

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The Parable of the Quiet Man

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Greg is a quiet man.  A great listener and a wise counsel.  Highly educated, not necessarily sought after as a source of knowledge but he is deeply trusted by those who know him.  To him the term “elevator pitch” involves a baseball and a small room.

Paul is gregarious.  Outspoken, opinionated, highly educated and not frightened to tell everyone what he thinks.  Famous in his field, Paul is sought after as a speaker and would walk into any room and everyone in the room knows who he is and they immediately know his personal brand.  He can recite his elevator pitch in seven different languages.

I worked with Paul and Greg over the years, one was an associate and one was a client.  Paul is wonderful in small doses and has infectious levels of energy.  But all that energy can be overbearing and that high level of confidence can lead to him providing opinions outside his field of expertise.  And because of the imprimatur that comes with his personal brand people will follow those opinions like sheep.

Give me Greg any day of the week.  Although underestimated by many, when he speaks you know it’s a carefully thought out response and he will only provide advice that he is confident is correct.  He may be underestimated by lots of people but not by me.

In a world where we have insta-celebrities providing advice to people on everything from personal hygiene to solutions to poverty, the world needs to take the time to listen to those quiet, thoughtful experts that might not have the big name.

 

 

 

Creeping Luxury

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“Oh I wouldn’t know anything about that type of posh stuff!!”  This was the comment from a bartender at the local pub on our recent trip to London, it was a response to us asking a question about the express train between Paddington and Heathrow and it really shook me.  I hadn’t thought of that expenditure as “posh” but given the price of the trip I can understand how it was perceived this way.

But this started me thinking about the money I spend on hidden luxuries that have crept in to my life.  I hope I don’t sound like a wanker when I ask this, but how is it that things that once seemed an extravagance have become an expected part of our life??

It can be seen in the housing market – my brother and I shared a bedroom growing up and a lot of our friends did the same, but this is now a very uncommon occurrence. Air conditioning, dishwashers and en suites are pretty much standard fare.  When my parents and grandparents were growing up these items would have been ridiculous luxuries reserved for only the wealthiest people but in a comparatively short period of time they are now expected.

It can be seen now in many other aspects of life.  Let’s take television – when my parents grew up any TV was a luxury, but now we have wonderful wide screen TV’s that are so realistic that it makes you feel like you are really at any event.  What about the TV content??  Once it was 2 stations here in Newcastle and that was it.  Now we have multiple free to air channels and in my house we have Foxtel, Netflix and Optus Sport.  Our monthly TV subscriptions amount to nearly $200 per month!!!  Again I hadn’t really thought of this a luxury but now, on reflection, I realise it is.

Think of most areas of life – telephones, cars, holidays and food – and I think most of us could identify a little bit of luxury that has crept in over the years.

So what to do about this??  I think the key is to identify the luxuries in your life and decide if you really need to continue with them.  Consider what you could do with that money if you didn’t buy the luxury (repay debts, invest, etc.) and whether this is more important than that bit of extra luxury in your life.  Don’t ever use the excuse that “I deserve it”.

If you decide to proceed with the purchase, then appreciate that this expenditure is a luxury and continually recognise it as such.  After all there’s nothing wrong with a little bit of affordable luxury in your life.

If I don’t wear a tee shirt am I still a disrupter?

domenico-loia-298642Last week I attended Xerocon – a 2 day national conference for Xero accounting software (www.xero.com.au).  Here’s a few things I learned:

  • Xero is not just software, it’s a bit of cult.  The conference was all about positive vibes, lots of hand clapping and huzzahs.  Everyone was wearing tee shirts, there was even a massive after-party.  Not what you expect from an accounting conference!
  • Artificial Intelligence (AI) is real, it’s happening and it’s a really hot topic of conversation.  Xero’s CEO is a self-confessed AI-nerd and he spoke with great passion about machine learning.  Xero is using machine learning to help automatically code more transactions.  They believe that by the end of the year more than 85% of all transactions will be automatically recorded by Xero based on learning from previous transactions within the file and transactions from other users.
  • Machine learning will also be used for more efficient recording of bills.  For example if you are a baker and record a bill for flour, Xero will automatically allocate it to cost of goods sold.  For non-accountants this is very powerful indeed.
  • I attended a panel discussion around AI, which was incredible.  Some very smart people discussing the short term implications of machine learning.  Interestingly they pointed out that all other industrial revolutions only increased employment rates and they were confident that the coming revolution is nothing to be scared of.  They wouldn’t be drawn into any predictions for a longer time frame than 10 years as they couldn’t make any confident predictions that far away.
  • Dr Adam Fraser is an outstanding speaker (www.dradamfraser.com).  If you have the opportunity to see him, grab it with both hands.  His presentation about the “third space” was the highlight of Xerocon for me and it should be compulsory viewing for all executives.  I can’t wait thread the book.
  • Magda Szubanski is a very good story teller.  As an accomplished author with a long career as a comedian and an interesting family background she has loads of material.  Passion just oozes out of her.

Overall the improvements announced for Xero were very impressive and represent a slight deviation to their previous business model.  It will be interesting to see what happens to the “disrupter” as it morphs into an industry leader.  Maybe they’ll start wearing suits!!!

 

5 Lessons To Be Learned From Pub Talk

pub2As an accountant, I can tell you the thing we all find very frustrating is “pub talk”.  For some reason many clients seem to believe that the guy they are talking to down at the local is somehow more switched on to accounting and tax issues than the person they are paying to have the knowledge of these matters.  So here are 5 lessons that need to be learned from pub talk.

1. My mate from the pub earns $150K a year and pays NO tax

LESSON: Your mate is a fraud.

2.  My mate at the Pub is a Doctor and they still get Family Tax Benefits for their children

LESSON: Your mate, while undoubtedly a nice person, is either an unsuccessful doctor or a tax cheat.

3. My mate at the pub gets a $10,000 tax refund why is mine only $500??

LESSON: People’s personal tax situations are like the stripes on a zebra – no two are the same.  The guy at the pub might have a negatively geared rental property, he might be studying, or he might be a bald-faced tax cheat.

4. I need a Self Managed Super Fund because my mate at the pub’s got one

LESSON: If you are ready to manage your own super, that’s great!  ASIC recommends a minimum balance of $200,000 and you need to be prepared to have knowledge of superannuation laws and regulations because the buck stops with you – the trustee – and there are hefty penalties if you get it wrong.

5. My mate at the pub said I should form a company so I claim more on my tax

LESSON: This is a very common misconception.  If you stay in your current job but suddenly work as a contractor your tax situation doesn’t change substantially (and this is ignoring the potential industrial relations issues).  You’ll be paying a bit more for accounting (which is a good thing of course) but for the majority of people the tax benefits are minimal at best.

 

I hope you will find this guide a handy resource the next time a bar fly at the local starts chewing your ear about tax.  Remember your accountant is the best resource for this type of advice, and we’re happy to advise you over a beer if that makes you feel better.

 

Disruption is Real

It’s my first blog post for a while and I thought this would be a good time to review the changes that have affected our industry as I really don’t think many people have a concept of what’s really happened.

As an example, consider a client who wanted us to prepare management reports for them a couple of years ago. They would reconcile their accounting software (95% of the time this would be MYOB) and send us a backup, usually on a CD but if they were advanced it would be on a new fangled USB drive. We would restore the backup, extract some reports and prepare working papers and financial statements on our internal software. Then we’d run some KPI’s on an excel spreadsheet and have a meeting with a client to review their numbers. At the conclusion of this process we would provide the client with an adjusting entry so that their data file would match our internal numbers.

The whole process would take a few weeks and at least 75% of the fees that the clients were paying was for us crunching their numbers.

Fast forward to 2016 and the change has been dramatic. Cloud based accounting software now allows the accountant and client to collaborate on one set of data (transferring backups is a rare event now). There’s rarely a need for us to prepare internal reports for management purposes as the software providers (MYOB have lost a slab of market share to Xero and others) now provide excellent reporting capability. Cloud based software is also available that will automatically link to the client’s cloud based accounting file to produce beautiful KPI reports. So what is the accountant’s involvement now??

Clients are now paying us for our advice and knowledge in interpreting these reports and explaining them in a meaningful way. We are being paid to add value to the numbers and oversee business growth, helping people set goals, build budgets and being there to enforce agreed actions. Its a forward looking role rather than the historians that we traditionally have been. And all this can happen within a few days of the end of the month as the data is available so quickly.

It’s a change that many saw coming and we were well and truly warned about it. The change has been rapid and it has left some people on the side of the road wondering what happened. Even internally we have seen some staff members go, largely because they couldn’t adapt to the change.

Disruption has changed so many industries over recent years, accounting is certainly no exception.

Early Boomers and House Prices

photo-1434384595115-e67e99090d7e.jpegAs I sat with some older retired clients the other night we discussed their plans for their home.  In their late 70’s they have little retirement savings left and their home is starting to get a bit “tired” – they need blinds, a new retaining wall and the old air conditioner is on the fritz.  We discussed the options available but without much money left in their super funds, the only option for them is a reverse mortgage facility.

As much as the thought of returning to debt in their late 70’s was unpalatable, they wouldn’t even consider the idea of selling the home and downsizing.  They live in a lovely home about 50 years old I guess which, traditionally, would have been the domain of the first home buyer.  This used to happen all the time, retiree downsizing sells perfect first home to a young couple who use this property to get a foothold in the housing market.

However with modern medicine these people in their 70s are active and very healthy, much more than their parents would have been at a similar age.  In fact their parents, if still alive, would most likely have been in a retirement or nursing home by their age.

This creates (another) supply issue in our housing market and I’m sure this is having an impact on house prices, particularly as it is restricting the supply of type of home that would normally have been snapped up by first home buyers.