Time to rethink - case study

Case study

Let's consider a potential client, Marlene aged 58, who's looking for your guid-ance in establishing a retirement income.

Case study

Let's consider a potential client, Marlene aged 58, who's looking for your guid-ance in establishing a retirement income. Marlene earns $10,000 in fully franked dividends from shares she bought for $70,000 that are now worth $140,000. We'll assume she isn't employed and that she's eligible to make super contributions. The fully franked dividends produce a franking credit of about $5,600.

Your immediate strategy is to sell the shares and contribute the proceeds to su-per which she will claim as a personal tax deduction. Her taxable income will be $10,600 ($10,000 +5,600 + 70,000 - 75,000). Marlene will pay no tax on this income as the imputation credits will eliminate any tax. For 1999/00 is the last year where if you don't use all the imputation credits you loose them (from 2000/01 onwards imputation credits become fully refundable for individuals, com-plying super funds and life insurance companies). This means that Marlene will waste about $4,800 in franking credits.

For superannuation surcharge purposes, her Adjusted Taxable Income will be $85,600. This means she will have to pay super surcharge at about 7.4% on her $75,000 deduction ($5,550).

So this really good strategy has produced a tax bill of over $10,000.