Managed Funds Imputation Fund Tax Query

Could someone please explain to me the way you are taxed with an Imputation Fund compared to a "normal" fund? I had it explained to me that as an investor, you would pay less tax on your distributions via these type of Funds.

Andrew.

 

in theory more franking credits

 

Um OK, and that means??

 

A business pays tax at 30%. When dividends are paid, it would be unfair for you to pay the full amount of tax on the income you receive, so companies get what are called "imputation credits".
All this means is that you get credit for the amount the company has already paid in tax.
Say the company earns $142.86 profit for the year. This is taxed at 30% of $42.86, leaving $100 that can be paid as a dividend. When that $100 gets to you, it comes with the $42.86 imputation credit. So your taxable income is $142.86, and then you get a $42.86 credit on your tax payable. All this means is that instead of paying 45% tax on the income, you only pay the difference between the company tax rate of 30% and your marginal rate, say 45%. So for an effective cash income of $100 you have to pay (if at the top marginal rate) only $21.42 on this income. This is more cash effective to you than if another company gave you a $100 Unfraked dividend (no imputation credit) and you had to pay the full $45.
Hope this makes sense!

 

Yep! Thanks for that explanation. Since I will be on the 30% bracket, it may mean I pay little or no tax then? An added bonus.

Andrew.

 

On a 30% marginal tax rate with a fully franked dividend, you would not pay any extra tax.

 

30% tax bracket means you pay only 1.5% extra for medicare levey.