Clarifying the ALP’s proposal on imputation credits
Last week the leader of the Opposition Bill Shorten announced that a Labor Government would stop refunding excess franking credits received from Australian company dividends.
Clearly there is a fair bit that would need to happen on the Australian political landscape to transform this proposal into law, however we thought it appropriate to identify exactly what it means to you.
To clarify, “dividend imputation” in Australia essentially prevents investors being double taxed; once at the company level and again at the individual level.
“Franking credits” allow individuals to reduce their taxable income by the amount they paid in corporate tax as a shareholder. This system was originally introduced by the Keating Government. The Howard Government extended the policy by refunding any franking credits not used to reduce taxable income.
The new proposal is not attempting to cease dividend imputation, rather returning to the original Keating system. Mr Shorten claims that this would save the government $59 billion over 10 years.
However, as stated in a “Super Central” article dated 20/3/18…”It is important to understand that excess imputation credits are not “moneys belonging to the Government” but an overpayment of tax by the shareholder – whether individual or superannuation fund – on the taxable income of the company.”
Who would be most impacted by this proposal if legislated in its current form?
Essentially, anyone who has a tax rate less than the corporate tax rate (currently 30%) would be impacted.
• People holding Account Based Pensions would be most affected as the tax rate applied to these funds is 0%. By way of example, if a pension fund holds a portfolio of Australian shares worth $250,000 which pay dividends at a yield of 4%pa – all fully franked.
• The franking credit is calculated as:
o {Company tax rate / 1-Company tax rate} x dividend x % franked
o = 30/70 x {4% x $250,000) x 100%
o = 30/70 x $10,000
o = $4,286.
• Presently the Account Based Pension holder receives a cash refund for all “unused franking credits”. As pensions have minimum drawdown requirements each year, it is easy to see that these credits would be valuable to a number of pension recipients as an annual income supplement.
• The proposal would nullify the credit and the unused franking credits would be lost.
• From this, Superannuants would also be impacted. The 15% earnings tax could be reduced to zero, however any resulting credit (i.e. where imputation credits exceed the earnings tax liability), would be lost.
Who would be least impacted?
• People on higher tax rates than the corporate rate will see no impact under this proposal. This is because the imputation credits would still be applied to reduce (or even nullify) the individual’s tax liability.
Conclusion
Opposition leaders from both major parties make countless proposals whilst in opposition. They engage the media to put a positive spin on their view of the world and deliver compelling arguments as to why the Australian voting public should elect them when given the opportunity.
In this case, the ALP would need to control both houses of Parliament to enact this proposal. This does not appear likely any time soon. History suggests that proposals of this nature tend to be significantly watered down before being legislated, or completely removed from the agenda.
That said, we will keep a close eye on this particular one!
