Franking Credits
The dividend imputation system was introduced in Australia by Paul Keating in 1987 to eliminate double taxation on dividends from company profits. This system was developed so that the shareholder ultimately pays the tax on the company’s profits. This is achieved by the company first paying tax on its profits which effectively is a prepayment of the shareholders’ tax liability. When the company pays a dividend, the shareholders then receive a rebate (called the franking rebate), for the company tax paid, against their tax payable on the dividend.
From 1987 to 2001, the franking rebate could only reduce the tax payable by the shareholder to nil – any excess unclaimed rebate was lost. The Howard Government regarded the denial of the excess franking rebate inconsistent with Paul Keating’s intention to effectively have the company’s profits taxed at the shareholder level. That is, if the shareholder was income tax exempt such as a charity or superannuation fund in pension phase, their share of the company’s profit should be exempt from income tax resulting in a refund of their share of the tax paid by the company.
Conversely, where a shareholder’s taxable income is taxed at a rate above the current company tax rate of either 27.5% or 30%, more tax will be paid by the shareholder on their share of the company profit received in the form of a dividend. In this context, taxpayers with taxable incomes exceeding $37,000, $90,000 and $180,000 have tax rates of 34.5%, 39% and 47% (including the 2% Medicare levy) respectively. That is, the tax revenue is enhanced by these higher rates of tax effectively applying to the company’s profits. This fact is rarely mentioned when arguing that persons/entities that are income tax exempt should not receive a refund of their excess/unused franking rebates. This is a classic case of “I’ll have my cake and eat it too”.
Labor’s Proposed Changes
If Labor is elected in the federal election on 18 May 2019, refunds of franking rebates will no longer be available from 1 July 2019. The proposed changes will not apply to charities, not-for-profit organisations, Centrelink pensioners and allowance recipients (including recipients of a full or part age pension, disability support pension, a carer payment, parenting payment, Newstart or sickness allowance). . Furthermore, self-managed superannuation funds (SMSFs) that had at least one Centrelink pensioner/ allowance recipient before 28 March 2018 will still be entitled to franking rebate refunds.
What is the Impact of Proposed Changes?
According to the ATO’s statistics approximately 33% of franking rebate refunds go to individuals, 60% to SMSFs and 7% to Australian Prudential Regulation Authority (APRA) funds.
The greatest impact of the proposed changes will be on SMSFs invested primarily in Australian shares where members are in pension phase and are not receiving a full or part government pension or allowance.
The proposal will affect 1.17 million superannuation funds and individuals many of whom made their superannuation plans based on receiving the refund of franking rebates.
Sources:
https://www.sunsuper.com.au/newsroom/labor-dividend-imputation
https://www.charteredaccountantsanz.com/news-and-analysis/insights/opinion/alp-blows-up-full-imputation-credit-refunds
https://www.ioof.com.au/financial-advisers/news-and-insights/adviser-news/articles/may-2018/dividend-imputation-credits
https://www.abc.net.au/news/2019-03-29/tax-changes-you-need-to-know-ahead-of-the-federal-election/10945466
https://www.afr.com/personal-finance/superannuation-and-smsfs/why-labor-s-franking-change-will-affect-those-saving-in-super-too-20190408-p51bzc
https://www.plato.com.au/superannuation-funds-may-affected-alp-franking-credit-proposal/
