Frankly speaking the nation’s divided on this one

What are ‘Franking Credits’? What are the ALP’s proposed changes to the ‘Dividend Imputation’ system? Why are many people, especially retirees, unhappy about it?

What are the proposed changes?

Most Australians have some form of holding in shares, either directly as a shareholder or indirectly through their super fund portfolio.

Before dividend imputation, there was essentially a double taxation of company profits. Companies would pay tax on their profits and then shareholders would pay tax again upon receiving their share of company profits, in the form of a dividend. The purpose of the system is to remove the double taxation of company profits in the hands of shareholders.

A dividend franking credit is essentially a credit, shareholders receive, for tax already paid by the company they hold shares in. At present, shareholders that are not taxable or do not have enough income to pay tax, receive a cash refund for their unused franking credits from the ATO. The proposed ALP changes seek to remove this option. So, the dividend imputation system will remain in place but, for many, there will no longer be an option to receive cash refunds for unused franking credits.

Who is affected and what is the proposed start date?

The change will start from 1 July 2019 and may affect shareholders that are not taxable or do not have enough income to pay tax. It won’t apply to cash refunds to charities and not-for-profit institutions (like universities). Nor will it apply to Centrelink pensioners (full and part) and allowance recipients. The exemption will also extend to self-managed superannuation funds (SMSFs) that had at least one pensioner/allowance recipient before 28 March 2018.




Individuals

Low income individuals that hold shares are potentially affected. The Government has released statistics that 54 per cent of the 610,000 individuals who receive credits have taxable income of under $18,200 per year. However, in subsequent changes to the proposal, those that are Centrelink pensioners will be exempt.

SMSFs

Self-Managed Super Funds, particularly those in pension phase, are also potentially affected. These, mostly self-funded, retirees will bear the brunt of the proposed changes. In 2016, approximately 47.1 per cent of SMSFs were in full or partial pension phase. Cash refunds to this sector have been substantial.

Self-funded retirees have faced a lot of changes in the last couple of years. The larger funds have been affected by the introduction of the transfer balance cap of $1.6 million. These funds will now be taxable and are likely to be able to use their excess franking credits. Transition to retirement pensions are no longer tax-exempt and will also be able to use the credits. It’s the smaller pension funds that will be most impacted and stand to lose all their excess franking credit refunds.

Retail Funds and Industry Funds

Large retail super funds, industry funds and superannuation platforms are not likely to be impacted by the changes because these funds have members both in the accumulation phase and in the retirement phase. Therefore, they will pay tax and can always use imputation credits. This means members of these funds that are in retirement pension phase should continue to receive the full benefit of dividend imputation credits.

Dissatisfaction with constant changes

Retirees are the most vocal critics of the proposed changes. Many object to the constant tinkering with superannuation laws, and changes to tax laws, by successive governments. Those who have planned their retirement based on existing rules feel it is unfair to shift the posts after they have retired and are no longer able to earn an income. The proposed ALP changes to franking credits are considered by many to be revenue raising at the expense of those who have worked hard towards funding their own retirement.

In summary

The imputation system has removed double taxation of company profits. It encourages investment in shares which provides essential capital funding to Australian companies. The system is remaining but the ability to receive cash refunds will be removed for a significant portion of shareholders. Australia is one of only five OECD countries that still has a full imputation system and the only one that has cash refunds for excess credits.

Many see this proposed change as another example of the endless tinkering by politicians affecting the superannuation system. Many are still working their way through the effects of the transfer balance cap and other 2017 tax changes. This constant change erodes confidence. This is especially the case for those that consider these changes to be inequitable and unfairly targeted at the segment of medium to smaller self-funded retirees.

Date posted: 2019-03-29 | posted by: condell




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