Australian Franking Credits for US Taxpayer

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Subject Author Date Australian Franking Credits for US Taxpayer W 06-22-2009  Re: Australian Franking Credits for US Taxpayer parrisbraeside@yahoo.ca 06-23-2009  Re: Australian Franking Credits for US Taxpayer Bat Man 06-24-2009  Re: Australian Franking Credits for US Taxpayer W 06-24-2009
Posted by W on June 22, 2009, 11:16 pm Please log in for more thread options I'm struggling to understand how a US taxpayer who owns an Australian stock that pays dividends benefits (or not) from Australian Franking Credits. As I understand it, the Australian system is that the company paying the dividend grosses the dividend up to an amount that - after tax is deducted - would realize the dividend they initially intended to pay. For example, if the company wants to pay a 10 cent per share dividend, and the tax rate is 30%, they calculate the dividend at a gross amount of 14.29 cents and then take out the 30%, thus giving the taxpayer a 10 cent dividend together with a "franking credit". It looks like the Australian taxpayer claims a 14.29 cent dividend on his Australian tax return together with the franking credit, thus avoiding paying any additional tax on the 10 cent dividend actually received. They thus avoid double taxation on dividends. If any of this is not quite right, someone please correct me. I'm not an Australian taxpayer. My question is would any of these facts benefit a US taxpayer receiving the same dividend? Specifically, can the US taxpayer claim the dividend at 14.29 cents, then claim Australian withholding of the dividend at 30%, thus at least partially reducing the additional tax that a 35% tax bracket US holder of the stock would need to pay in US taxes on that dividend? -- W -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by parrisbraeside@yahoo.ca on June 23, 2009, 6:43 am Please log in for more thread options > I'm struggling to understand how a US taxpayer who owns an Australian stock > that pays dividends benefits (or not) from Australian Franking Credits. > > As I understand it, the Australian system is that the company paying the > dividend grosses the dividend up to an amount that - after tax is deducted - > would realize the dividend they initially intended to pay.    For example, > if the company wants to pay a 10 cent per share dividend, and the tax rate > is 30%, they calculate the dividend at a gross amount of 14.29 cents and > then take out the 30%, thus giving the taxpayer a 10 cent dividend together > with a "franking credit".    It looks like the Australian taxpayer claims a > 14.29 cent dividend on his Australian tax return together with the franking > credit, thus avoiding paying any additional tax on the 10 cent dividend > actually received.    They thus avoid double taxation on dividends.    If > any of this is not quite right, someone please correct me.   I'm not an > Australian taxpayer. > > My question is would any of these facts benefit a US taxpayer receiving the > same dividend?   Specifically, can the US taxpayer claim the dividend at > 14.29 cents, then claim Australian withholding of the dividend at 30%, thus > at least partially reducing the additional tax that a 35% tax bracket US > holder of the stock would need to pay in US taxes on that dividend? In general (because I am not familiar with the Australian tax system but am with the Canadian which has a similar mechanism,) the US return would report the actual dividend. I generally only claim the tax paid after preparing a tax return but I understand that a number of people claim the tax withheld. The only concern about that is that any taxes later refunded become taxable. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Bat Man on June 24, 2009, 7:21 pm Please log in for more thread options > I'm struggling to understand how a US taxpayer who owns an Australian stock > that pays dividends benefits (or not) from Australian Franking Credits. > > As I understand it, the Australian system is that the company paying the > dividend grosses the dividend up to an amount that - after tax is deducted - > would realize the dividend they initially intended to pay.     The Australian corporate taxes paid are not available as foreign tax credits in the U.S. unless the shareholder is a U.S. corporation that owns at least 10% of the stock of the Australian corporation. See section 902. U.S. tax rules apply and the U.S. does not have a franking system and the treaty does not change the rule. The problem is that the Australian taxes are imposed at the corporate entity level and not at the shareholder level (most dividend withholding taxes are technically imposed on the shareholder but the corporation has a withholding obligation -- similar to an employer withholding taxes on an employee). > My question is would any of these facts benefit a US taxpayer receiving the > same dividend?   No. Specifically, can the US taxpayer claim the dividend at > 14.29 cents, then claim Australian withholding of the dividend at 30%, thus > at least partially reducing the additional tax that a 35% tax bracket US > holder of the stock would need to pay in US taxes on that dividend? No. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by W on June 24, 2009, 10:27 pm Please log in for more thread options >> I'm struggling to understand how a US taxpayer who owns an Australian >> stock >> that pays dividends benefits (or not) from Australian Franking Credits. >> >> As I understand it, the Australian system is that the company paying the >> dividend grosses the dividend up to an amount that - after tax is >> deducted - >> would realize the dividend they initially intended to pay. > > The Australian corporate taxes paid are not available as foreign tax > credits in the U.S. unless the shareholder is a U.S. corporation that > owns at least 10% of the stock of the Australian corporation. See > section 902. > > U.S. tax rules apply and the U.S. does not have a franking system and > the treaty does not change the rule. The problem is that the > Australian taxes are imposed at the corporate entity level and not at > the shareholder level (most dividend withholding taxes are technically > imposed on the shareholder but the corporation has a withholding > obligation -- similar to an employer withholding taxes on an > employee). In the example I gave, there is a 10 cent fully franked dividend. An Australian taxpayer would receive 10 cents, then claim on his income tax 14.29 cents as the dividend, together with a 4.29 cent franking credit, thus realizing after tax something close (depending on his actual tax bracket) to the original 10 cents paid. Are you saying that the Australian corporation paying the same dividend to a US citizen will in addition withhold some of the 10 cents? Obviously that gets really ugly really fast. Because you are losing not only the 4.29 cent franking credit, but you are losing something additional to that. Before you even start paying U.S. tax you are already down close to 50%. >From the standpoint of the US citizen receiving this dividend, don't you at least get to claim the part of the 10 cent dividend withheld from payment as an explicit withholding tax? As I understand it the "workaround" for this would be for the American taxpayer to own a U.S. Corporation (could it be an S corporation?) which would own at least 10% of an Australian corporation that would own the Australian stock. The Australian corporation would then file directly to the Australian authority and be able to avoid both the withholding on the 10 cents, as well as get the franking credits of 14.29 cents. Then whatever portion of that income is paid as dividend from the Australian corporation to the U.S. corporation becomes ordinary income to the U.S. corporation? In this case the Australian corporation did not pay the tax on the dividend (it just owned the stock that paid the dividends), so presumably the U.S. corporation gets no foreign tax credits from that pass through dividend situation and that income would be full ordinary income to the U.S. corporation (or shareholder in case of an S-Corp)? But at least in this case you have a situation that is not worse than owning a U.S. stock directly. At least you won't be losing 30% Australian franking credits plus 30% Australian withholding tax plus 35% U.S. ordinary income on what is left! If the U.S. corporation owns at least 80% of the Australian corporation, is there any advantage, as there would be passing a dividend from one U.S. corporation that is at least 80% owned to its parent U.S. corporation? Since the subsidiary is in this case not paying U.S. tax I guess probably not. All in all, it sounds like a nightmare, pretty complicated no matter how you do it. I'm sure every country involved will want to understand why you didn't want lose 75 cents of every dollar to taxes to boot. -- W -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted Australian Superannuation Funds May 1, 2007, 7:12 pm Ignorance of the average taxpayer? April 28, 2008, 2:17 pm Bankruptcy questions RE: non-filer taxpayer January 10, 2007, 9:38 pm Can taxpayer revoke installment agreement? 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