Franking credit refund calculator

Franking credit refunds are a hot topic this election. It got me wondering about what exactly these changes would (financially) mean to the early retirement crowd.

Obviously, everyone's situation will be different, and I doubt many people are aiming for a retirement income based on 100% fully franked dividends only. But to keep things simple, the below calculator assumes a single income earner wants to know their net income with and without franking credit refunds - assuming no other income. The calculator also assumes all dividends represent 4% of the portfolio size.

Perhaps most importantly, the below refers to individuals who are pre-retirement age. As I understand it, most of the perception of 'unfairness' around the use of franking credits as a mechanism to avoid double taxation are when full refunds are paid on large retiree portfolios who do not pay income tax.

That's a different problem though. Sure, abolishing franking credits completely will 'fix' the inequitable benefits of refunds for wealthy retirees, but it will also remove a system which benefits low income-earning investors pre-retirement.
This calculator tells me a few things:

  1. If you have any less than $125,043 in dividend income, you will be worse off if franking credits are abolished.
 

  2. Franking credit refunds peak with a portfolio value around $625,000 (refund of $7,386.76) 

  3. There are diminishing returns in franking credit refunds expressed as a proportion of all dividends. In simple terms, this means abolishing franking credits would have the biggest impact on the lowest income earners.

For the early retirement community, it's clear to me that franking credits are a good thing, have an asymmetrical benefit to the lowest income earners, and have no real benefit for the wealthy.
 
What do you think? Are these calculations correct? Or am I missing something?

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Comments

  1. I think it would be less than 137k of dividend income (factoring in medicare levy). Of course anyone can shift their investments slightly to overseas markets to absorb these credits elsewhere. So really I don't think there will be much change for anyone if they have any split between Australian and OS equities. - Matt

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    Replies
    1. Hi Matt,

      You make a good point about factoring in Medicare levy. I did leave that out to keep things as simple as possible - though I neglected to mention it.

      If I understand you correctly, you're saying: person A with part of their portfolio in OS equities, which do not qualify for franking credits, will not be as impacted by the removal of franking refunds, while person B with all of their investments directed towards Aussie fully franked dividend paying shares will be more impacted by the changes.

      If so, I think you and I are saying the same thing.

      The merits of international diversification is a different debate, but if you follow Peter Thornhill's investment strategy (which I think is different to his wealth creation philosophy), and I'm guessing a few people do, you would be in 100% Australian fully franked equities. No?

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    2. yeah absolutely. Although personally I would prefer a little bit of overseas diversification.

      More importantly to me it seems that this new franking policy is one that incentivises investing anywhere but in Australian businesses. Which isn't a great policy really.

      Labors main beef seems to be with people with high (non-taxable) income. If that is their problem then they should set policy to change these thresholds. Politically they know this won't fly so instead they are changing the secondary effect of franking credit refunds.

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    3. I hadn't that these proposed changes might also deter domestic investment. That's an excellent point!

      Delete

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