a. If you sell the shares, your capital gain will be $20 ($50 - $30). Since you've held the shares for more than 12 months, you're eligible for a 50% capital gains tax discount. So, your taxable capital gain is $10. At a marginal tax rate of 38%, your tax on the capital gain will be $3.8. So, your after-tax income from selling the shares will be $46.2 ($50 - $3.8).

If you wait and receive the dividend, the grossed-up dividend is $28.57 ($20 / (1 - 0.3)). Your tax on the dividend will be $10.86 ($28.57 * 0.38), but you receive a franking credit of $8.57 ($20 * 0.3). So, your net tax on the dividend is $2.29 ($10.86 - $8.57). Your after-tax income from the dividend will be $67.71 ($50 + $20 - $2.29).

So, you will have different after-tax income if you sell the shares or wait and receive the dividend. You will have more after-tax income if you wait and receive the dividend.

b. If the dividends are unfranked, you don't receive a franking credit. Your tax on the dividend will be $7.6 ($20 * 0.38). So, your after-tax income from the dividend will be $62.4 ($50 + $20 - $7.6).

The difference between the two options in part (a) is now $16.2 ($62.4 - $46.2). You will still have more after-tax income if you wait and receive the dividend, but the difference is less than when the dividend is fully franked.

Question

a. If you sell the shares, your capital gain will be $20 ($50 - $30). Since you've held the shares for more than 12 months, you're eligible for a 50% capital gains tax discount. So, your taxable capital gain is $10. At a marginal tax rate of 38%, your tax on the capital gain will be $3.8. So, your after-tax income from selling the shares will be $46.2 ($50 - $3.8).

If you wait and receive the dividend, the grossed-up dividend is $28.57 ($20 / (1 - 0.3)). Your tax on the dividend will be $10.86 ($28.57 * 0.38), but you receive a franking credit of $8.57 ($20 * 0.3). So, your net tax on the dividend is $2.29 ($10.86 - $8.57). Your after-tax income from the dividend will be $67.71 ($50 + $20 - $2.29).

So, you will have different after-tax income if you sell the shares or wait and receive the dividend. You will have more after-tax income if you wait and receive the dividend.

b. If the dividends are unfranked, you don't receive a franking credit. Your tax on the dividend will be $7.6 ($20 * 0.38). So, your after-tax income from the dividend will be $62.4 ($50 + $20 - $7.6).

The difference between the two options in part (a) is now $16.2 ($62.4 - $46.2). You will still have more after-tax income if you wait and receive the dividend, but the difference is less than when the dividend is fully franked.

Knowee AI · Accepted Answer

a. If you sell the shares, your capital gain will be $20 ($50 - $30). Since you've held the shares for more than 12 months, you're eligible for a 50% capital gains tax discount. So, your taxable capital gain is $10. At a marginal tax rate of 38%, your tax on the capital gain will be $3.8. So, your after-tax income from selling the shares will be $46.2 ($50 - $3.8).

If you wait and receive the dividend, the grossed-up dividend is $28.57 ($20 / (1 - 0.3)). Your tax on the dividend will be $10.86 ($28.57 * 0.38), but you receive a franking credit of $8.57 ($20 * 0.3). So, your net tax on the dividend is $2.29 ($10.86 - $8.57). Your after-tax income from the dividend will be $67.71 ($50 + $20 - $2.29).

So, you will have different after-tax income if you sell the shares or wait and receive the dividend. You will have more after-tax income if you wait and receive the dividend.

b. If the dividends are unfranked, you don't receive a franking credit. Your tax on the dividend will be $7.6 ($20 * 0.38). So, your after-tax income from the dividend will be $62.4 ($50 + $20 - $7.6).

The difference between the two options in part (a) is now $16.2 ($62.4 - $46.2). You will still have more after-tax income if you wait and receive the dividend, but the difference is less than when the dividend is fully franked.

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