CGT, franking credit changes to reduce share gains

Proposed changes to franked dividends will affect individuals who are on high rates of tax due to accompanying changes to capital gains tax (CGT), reducing long-term gains by close to 20 per cent, according to AMP Capital.

Speaking as part of an earnings season update, AMP Capital income portfolio manager Dermot Ryan said the main focus for the franking credit changes proposed by the Labor Party has been SMSFs and self-funded retirees, but individuals would also be hit.

Ryan presented figures showing that based on effective after-tax returns, an SMSF trustee or retiree paying zero tax receives an uplift of up to 43 per cent on the cash value of franked dividends, but for every $1 of capital gains or unfranked dividends received by them, it will only be worth $1 if held for more than 12 months.

In contrast, he pointed out individuals currently on the top marginal tax rate pick up 22.5 cents on an unfranked dividend of 52.5 cents for a total franked dividend of 75 cents, but also secure a long-term gain on 76.3 cents.

This latter figure would be reduced by 17.5 per cent to 62.9 cents as a result of proposed changes to CGT, which would also reduce unfranked dividends to 50.5 cents and franked dividends to 72.1 cents for people in the highest tax bracket.

“The first thing people will need to consider with these changes is what tax rate are they on because another nuance in the franking credit changes is the proposed changes to capital gains tax if the holding period is more than 12 months,” Ryan said.

“What we see is that longer-term gains will also become less attractive if these changes go through and individuals at the bottom and the top tax rates lose out as a result of the franking credit and capital gains tax changes.”

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