When should you automatically reinvest dividends and when should you take the profits in cash on a company share?
Is there a rule you follow?
Dividend Reinvest or Not on Stocks?
PLANT on 18/03/2018 - 05:34
Last edited 18/03/2018 - 09:29 by 1 other user
Last edited 18/03/2018 - 09:29 by 1 other user
Comments
When your income is derived mostly from dividends, otherwise just have them automatically reinvested. Though that Shorton corporate tool wants to double-tax them if he gets elected.
You will remain able to offset franking under the Labor proposal, including, I expect, carrying franking credits forward. Just not get a refund if you pay zero other tax.
And, of course, it is only franked credits affected.Yes, that is as I understand it. Here's thing though, people earning under 18K pay NO tax, so people earning under 18K from their divvies pay the 30% (or the company does on their behalf) tax on those divvies. Therefore because they earn under 18K they should be able to claim that tax back just as if you earned under 18K any other way. From an email I got the other day:
"While Mr Shorten tries to sell the plan as a tax on the rich, Treasury analysis shows that 54 per cent of those worse off from the changes (or 330,000 Australians) are those earning less than $18,200 per annum. Additionally, 43 per cent (or 128,000 people) of those who will be worse off earn between $37,001-$87,000 per annum while only 3 per cent (800 people) of those affected earn over $87,000. Rather than taxing the rich, the changes mostly affect those on the lowest income, hitting families who had relied on having a certain income stream, and retirees the hardest. It could force thousands of people in retirement into seeking the full or part pension as their annual income is reduced, thereby costing the government (and taxpayers) more in welfare payments. For those who value the extra income and are already on the pension, they may have no recourse to compensation for the money they lose. It is an exercise in posturing and class warfare that could actually cost everyone more."
Luckily, these assets are very liquid. Nobody is forcing anybody to buy shares that pay franked dividends,mane anybody who owns the: can sell them tomorrow easily.
I am sure the number you quote are correct. Many people who own these shares are retired people who have low incomes (like almost everyone who is retired).
But if they are gaining meaningful income fro franking credits, they must have hundreds of thousands of dollars worth of shares.
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This specific proposal targets a minority of people who otherwise pay no tax yet hold substantial assets. They are still eligible for the pension or other welfare if they are poor.
But the way this is currently setup, a couple could own $600,000 worth of bank shares, and pay no tax, earn $36 p.a. in dividends plus get a $12k tax refund. Plus qualify for a part pension. And qualify for cgt discount when they eventually sell the shares.
(The above Calc based on a notional bank share paying 6% franked dividends).Compare that to a couple with wages income of $48k who would pay tax, and don’t have the benefit of $600k in share capital.
If you accept we can’t fund a budget in deficit, we need to have greater taxes (with fewer loopsholes) and/or lower spending. A tax increase like this does not target the poor, and is effectively voluntary, as you can easily avoid it. Because older people have both the highest wealth, and the largest tax concessions by a country mile, they are going to have to do some of the budget repair work, no matter what.
If there is an alternative proposal to raise the equivalent money that is more fair, by all means put it forward. But don’t just say by cuts or savings without identifying them and their value.
You are, presupposing, they won't tweak this before the go forth with it. Given the reaction I'm sure they will play with the thresholds. The biggest class warfare is on the LNP on the lower end of society - no pay increase for the lowest paid but a lot of tax breaks for the upper end of town; particularly when they have the right tax agents to hide their income and the family trust system.
Without indicating who sent the email or the purpose of it then it is hard to determine the validity of it.
Couple with gross income of $48k pay the same tax whether it is from franked divs or wages.
"If you accept we can’t fund a budget in deficit, we need to have greater taxes (with fewer loopsholes) and/or lower spending."
Nailed it.
I vote for 'lower spending'. :)
The rich always want to find ways to govern the poor… using the poor's money.
They hate it when you tell them what to not do.@Kangal: But the majority, even the poor, keep voting them back into power…every single time and I can't figure it out.
Lack of education…. with independent and critical thinking.
The super-low-end have gotten smarter, in that, they can read and write and have better spelling, grammar, geography and numeracy. However, the mid-range human has largely plateaued in intelligence, with newer smarter improvements mixed with dumber social media and justice warrior behaviour. The truly intelligent ones biologists, chemists, engineers, physicist, and mathematicians… we don't truly know.
Mr Shorten tries to sell the plan as a tax on the rich
Hahahaha.
That's hilarious because of who Labour takes donations from. Usually the same amount as they gave the Liberal party ie. it don't matter.
The largest corporations operating in Australia are not going to pay more than 2% effective tax rates just like they are now and the tax burden is being shifted onto individuals.
A vote for either party is a vote to continue this arrangement where you get (profanity).
@EightImmortals:
Fine. Propose some lower spending that we can debate if it is a better source than this tax.
"Cutting waste" is not a proposal unless you can tell us where and how much.
The gov already mandates an efficiency dividend on the public service, so we start with cuts baked in@mskeggs:
I would argue the point that you can easily avoid this. For the scenario you are talking about - retirees living off dividends (with or without a partial pension), have more than likely they have been investing small portions of their income over the years, slowly accumulating their portfolio. For them to sell particular shares may lead to a large capital gains tax on those shares, as they may have been rising for many years. They would then have considerably less to reinvest for their future (not even bringing the brokerage into the equation).I just don't understand why it seems like every incentive to save is penalized. Couple A - work hard for 40-50 years, living simply and frugally, so as to regularly save and invest a portion of their income. Couple B earn the same amount, but go on holidays, eat out often, upgrade their cars regularly and save nothing.
Fast forward to retirement, couple B now have nothing to retire on and are reliant on a pension. Couple A are not rich in any way, but are self funded retirees. And couple A are now forced into either selling a large portion of their portfolio and losing that way, or in the very least, no longer receiving the tax refund on the franked shares (which were a large part of their investing strategy) - which indirectly goes couple B.
Why bother investing and saving money - just go and spend it all now.Yes there is a deficit - unpopular as it may be, I would suggest increasing GST dramatically - that would truly make it an optional tax. If you want the fancy cars etc - you pay the extra tax, whilst the people who choose to build up their wealth are not punished.
@Diji1: Please suggest your alternative party which you approve of.
It would seem people are seeing that minor parties are just that. Full of noise for single issues but ill equipped to actually govern. See Batman results in Victoria and the failure of the NXT party to win a seat in the South Australian election.
@saxlady: It is most unfortunate that views like this are never properly considered in politics. Tall poppy syndrome apparently precludes commonsense or even the acknowledgment that we want to encourage self funded retirees.
@saxlady: politicians would argue that this is a Democratic country and therefore have more than one option of living their life to ultimately achieve the same goal
@saxlady:
I take your point on CGT, but I don't agree with your characterisation that this is a big deal.
Remember, this change ONLY impacts people with income below $18k. Above that, they will still be able to offset franking credits against income.
If you were in the risky and distorted position of earning every cent of your income from franked dividends - the worst case scenario, then your tax refund for franking would be $5400.
You could sell shares with a CGT exposure of that amount and neutralise the new measure, continue to pay no tax, and take the sensible move to diversify your portfolio away from 100% franked shares.
Doing this each year would likely take longer to sell down the shares than the person holding them will live…
Viewed in this light, the proposal is giving people a motivation to do something in their best interest.
Brokerage is under $20 (and tax deductible!) so really isn't a meaningful issue.And bear in mind the refund provision was only introduced by John Howard, and only became of any particular worth as the tax free threshold was increased, causing the cost to the budget to increase.
As to your philosophical point that we should reward savers. Well, we very much do.
The age pension is quite meagre (though substantially ahead of most other welfare payments) and is heavily means tested (well, income tested anyway). This motivates people to save should they wish to avoid penury.Superannuation is lightly taxed on contribution and earnings to a stupidly high balance ($3.2m for a couple!). Why would we want to offer further tax savings to people who have millions of dollars of investments? They can equally choose to spend their wealth and income, and are not mandated to save such vast sums.
Raising GST would provide additional revenue, but will disproportionally affect people with lower incomes, as their GST tax paid is a much larger percentage of their unavoidable living expenses. A rise in energy prices, for example, might shrink an age pensioners discretionary budget by half, but shrink somebody with a $200,000 income's discretionary budget by only a percent or two, because the first has such a small budget 'left over' after paying for all their needs, while the second has much more in dollar terms to absorb a change.
For this reason, I greatly favour progressive taxes, and by the sound of your example of flashy consumption, at heart you do too.
I would recommend that dividends are not reinvested. As mskeggs has noted it generates a lot of paperwork that must be kept to calculate Capital Gains Tax.
Consider if you had a portfolio of five shares held for ten years and sold them. That would involve 100 separate documents and calculations. This would add chargeable time in your tax preparation.Not only that but if you participate in DRP then you are depriving yourself of making a conscious decision about whether that money should be reinvested into that particular business or some other business that might be better value for investment at any particular given point in time.
I don’t think DRP is a good idea unless you are absolutely sold on a particular company, they are excellent with capital management & have great returns exceeding other similarly priced shares at all times.
Am I missing something or does 100 seem exaggerated?
I hold some shares in DRP that pays semi-annually; that's 2 pieces of paperwork that I need to keep track of at most for future CGT.
If I hold them for a decade, it's just 20 pages (which takes 30secs to calculate for each reinvestment entry on excel mind you or roughly 10 to 15mins) to keep track of?
Your calculation is identical to his. 20 pages for each of 5 shares.
The hassle being when you misplace one or two, or don't record the buy price and have to go searching.
Not a big deal, but requires organisation and/or diligence.I'd be keen to hear of a cheap broker who captures this as part of their reporting platform.
Personally I only reinvest dividends if the amount I'll receive from one payment is enough to buy at least one share, otherwise it will take you multiple years to accumulate one share.
You'd only do this to maximise on the compounding.
It is a pain to keep the paperwork for cgt purposes if you are as disorganised as I am.
Otherwise, I think the only rule is take the cash if you need the income.