Australian Franking Credits for US Taxpayer


W

W

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?
 
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P

parrisbraeside

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.
 
B

Bat Man

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.
 
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W

W

Bat Man said:
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.
 

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