Franking credit changes: Winners and losers?


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Should shareholders get tax breaks?

Labor’s proposal to remove refunds of unused imputation credits has reignited intense debate among Australian investors amid claims retirees and self-managed super fund members would be hardest hit.

Retiring Stirling MP Michael Keenan said the policy would affect “85,000 older West Australians” and would be a key election issue for current Liberal candidate for Stirling, Vince Connelly.

Labor leader Bill Shorten announced in March last year that if Labor won the upcoming Federal Election they would abolish the current imputation credit policy.

The Opposition Leader said the existing policy was set to cost the Federal government more than $56 billion over the next ten years.

But Mr Keenan said retirees would be hit hard by Labor’s proposed change.

Of the around 148,000 people living in the Stirling electorate, Mr Keenan estimated that “5500 people … are going to have their retirement incomes cut by the Labor policy, including pensioners, self-funded retirees and those saving for their own retirement.”

Financial strategist Theo Marinis welcomed the franking credit policy change, saying he believed investments needed to stop being treated like a “punt at the track.”

“(Labor’s) policy might force retirees not to skew their investments towards Australian shares that pay highly franked dividends. Having done so in the last 10 years would actually cost retirees money,” Mr Marinis said.

According to Mr Marinis, portfolios should be split between Australian and International shares on a 50/50 basis.

Skewing portfolios towards Australian shares to get franking credits meant their performance had not been as high as it would have been if investors had diversified their portfolios.

However, leading investor Geoff Wilson previously told media he disagreed with the Labor policy, suggesting the current legislation promoted economic stability by discouraging corporate debt and encouraging investment in Australia, creating more jobs and more tax being paid.

In September 2018, the Coalition announced a House of Representatives standing committee on economics to inquire into the implications of Labor’s proposal to remove refundable franking credits.

As part of the inquiry, 12 public hearings were held nation-wide with no formal witnesses.

What is the franking credit policy?

Under current legislation, the franking credit refund policy benefitted people who do not pay much tax but own shares in companies.

Franking credits, also known as imputation credits, were first introduced in 1987 by the Hawke/Keating Government to stop the double taxation of company profits. if companies have paid tax on their incomes already, then why should shareholder also pay tax when they get a share of company profits (in a payment from the company called a dividend).

In 2001, the Howard Government changed the law to allow Australian companies pass on tax at a company level to shareholders.

Since then, franking credits could be used to reduce income tax paid on dividends or be received as a tax refund.

The current franking credit policy proposed by Labor is aimed at reversing the Howard Government decision by targeting wealthy retirees who pay minimal taxes.

So, who is correct?

Surveys conducted by the Australian Bureau of Statistics reveal which retirees own shares but not whether they receive imputation credits, or how much income tax they own.

According to RMIT ABC Fact Check, Mr Morrison’s claims that removing refunds of imputation credits will mainly hit low income earners is misleading.

Tax free superannuation is the largest source of income for many wealthier retirees.

Retirees with the lowest taxable income are likely to be wealthier self-funded retirees, the target audience of Mr Shorten’s reversal of the policy.

According to the Parliamentary Budget Office, nearly a quarter of all refunds claimed in 2014-15 went to 33,761 self-managed superannuation funds with balances of over $2.4 million.

Yet the policy will still affect some retirees with lower levels of income.

Using the taxable income of individuals is an overall inaccurate way of conveying the fairness of Labor’s policy, revealing little about the financial position of those affected.