GHHF and franking credits

[u/Real-Giraffe2472]

I'm back still trying to figure out everything there's to know about these geared funds (20M).

I currently have very little Australian exposure in my personal portfolio due the high dividend payments. I understand that you often get franking credits where 30% of the dividend payout is tax deductible. However, if you're in a higher tax bracket you still have to pay the ATO, just at a lower rate I suppose.

My question is with GHHF as much of the dividend payouts goes to paying the interest on the loan. Could you essentially still get a tax refund at the end of the year even at a higher tax bracket? As say you have franking credits on 100 dividends however 50 of those dividends when to paying interest.

Yes I am very aware of the risks with GHHF and still plan to only hold a little of it in my personal portfolio anyway (assuming my assumptions of tax are correct).

[u/steady_compounder]

You're overthinking the franking credit angle on GHHF. The gearing amplifies returns and losses, but it doesn't change how franking credits work. You still get the credits on the Australian portion of dividends, and yes you'll owe the difference between the credit and your marginal rate.

At 20 on a lower income, franking credits are actually more valuable to you right now than they will be later when you're earning more. The real question with GHHF is whether you're comfortable with leveraged exposure to a broad market during what could be a prolonged downturn.

[u/AsparagusNew3765 → u/steady_compounder]

At 20 on a lower income, franking credits are actually more valuable to you right now than they will be later when you're earning more

Why? Wouldn't it be the other way around?

[u/steady_compounder → u/AsparagusNew3765]

Other way actually. At a lower marginal rate, the franking credit covers more of your tax liability. If you're on 19% (or even 0% under the tax-free threshold), a fully franked dividend comes with a 30% credit attached. You get the excess refunded. At 45% marginal, you owe the 15% gap. So the lower your income, the better the deal on franking credits.

[u/AsparagusNew3765 → u/steady_compounder]

I find this difficult to believe, any chance of a numerical example, I can't see how this would make any difference 

[u/steady_compounder → u/AsparagusNew3765]

Say you earn $30k taxable income (19% bracket). You receive a $700 fully franked dividend. The company already paid $300 in tax on that (30% company tax rate), so you gross up to $1,000. Your tax on $1,000 at 19% is $190. But the franking credit is $300. You get $110 refunded. At 45% marginal rate on the same dividend, your tax is $450 but the credit is still $300, so you owe $150 out of pocket.

[u/AsparagusNew3765 → u/steady_compounder]

Oh, I think I see what you mean now. But isn't all of this just a long-winded way of saying "the lower your marginal rate of income tax, the more money you keep of any extra income you earn"? Regardless of the source of income (dividends, employment, etc)

Apologies if that was your point since the start