With the Federal Elections just around the corner, the debate on Franking Credits is heating up particularly Retirees and SMSF members. Franking Credits that were introduced 20 years ago by the Howard Government, the policy of allowing tax refunds on franking credits for those on zero tax rates had seen costs blow out from almost nothing to $6 billion or more a year and pretty soon it will cost $8 billion.
What are Franking Credits?
Well, a majority of you may already now but for those who don’t, Franking Credits also known as Imputation Credits are a type of tax credit that allows Companies in Australia to pass on tax paid at the company level to shareholders. The benefits are these franking credits can be used to reduce income tax paid on dividends or potentially be received as a tax refund. If you want to learn about Franking Credits you have come to the right place. Basically franking credits stop the double taxation of company profits as the tax paid at company level can be passed to the shareholder.
What changes are being proposed?
Bill Shorten at an election campaign rally in Burwood over the weekend addressed the retirees about Franking Credits by stating that if they were getting a tax credit when they haven’t paid any income tax, this was a gift. It was not immoral, nor was it illegal, but it was a gift lifted from the taxes paid by working class and middle class people in Australia. It was a tax loophole that could easily be utilized in strengthening the health infrastructure to benefit the people. He added that if Labor came to power, it will put in $50 million to kickstart phase two of the redevelopment of Concord hospital which was in desperate need of renovation.
Just to add more clarity, if the Labor proposal comes into effect, franking credits will still be used to reduce tax payments, but the proposed changes would mean that taxpayers will no longer be able to obtain cash refunds for excess credits if they exceed tax liabilities (currently equating to a full refund for investors with no tax liability).
The policy will only apply to individuals and superannuation funds, and not to bodies such as registered charities and not-for-profit organisations. Union bodies, as registered charities, have effectively been exempted. The older independent investors may be most exposed – as they are most likely to receive franking credits in the form of cash refunds, which then contribute to their income stream. Retirees with SMSFs are likely to be impacted in a similar way. The SMSF Association estimated that it will cut around $5,000 of income from the median SMSF in retirement phase earning around $50,000 per year in pension income with a 40% allocation in Australian shares.
To soften the effect of the proposal on retired individuals and SMSFs and counter the claim that they have been unfairly singled out, a pensioner guarantee exemption has been proposed for recipients of a full or part aged care pension, and people on other allowances such as carers, pensioners, disability support, unemployed and parenting payments. This means SMSFs with at least one exempt person would also be exempt. In addition, Labor has also proposed reducing the capital gains tax discount from 50% to 25%, which will apply to all investments, and also introducing a 30 per cent tax rate for family trusts.
Our Views
As highlighted in our last report on the subject, our analysts are of the opinion that implementing the same may not be as simple as it appears because it would require Labor to win a Majority during the election, if they lose or end up forming a coalition government, the proposal may not see the light of the day due to opposition but as investors you need to be prepared for the outcome if Labor comes to power.
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