According to the leader of the Labor party, Bill Shorten, Australia’s franking credits system will remain in place but one important change will be made, if Labor is elected at the next election.
What Are Franking Credits?
Think of franking credits like ‘tax credits’. They arise as part of the Imputation System. It was designed to stop ‘double taxation’ of investors who hold shares in companies.
Basically, if an Australian company pays tax in Australia they may be able to pay dividends to shareholders with these ‘tax credits’ attached to the payment. The credits are stored at the Australian Tax Office (ATO) until a shareholder completes their tax return.
What’s The Big Deal About Franking Credits?
If an individual shareholder or superannuation fund has excess franking credits in their name but no tax due in a particular year, under the current tax system that shareholder can receive a refund of the franking credits.
According to Bill Shorten’s Labor party, stopping the refund component only could save the Australian economy about $11.4 billion over coming years. Meaning, the shareholders could still use the franking credits to offset their dividend income but refunds would no longer be allowed.
“Labor created dividend imputation, we understand its value and we will maintain it,” Mr Shorten’s speech in Sydney reads.
“Every dollar allocated to tidy little arrangements for people who already have millions of dollars is a dollar that can’t be used to repair the budget and bring Australia back to surplus.”
The changes are expected to affect higher income earners who use Superannuation (and self-managed Super funds) to invest in companies. For example, people currently over age 60 can use tax-free Superannuation accounts to earn an income stream and get a refund of excess franking credits.
“The cash payments cost the budget $550m the first year they were paid,” The Guardian reports. “The ATO estimates that the measure cost $4.6 bn in 2012-13, and Labor claims that abolishing the payments from 2019 will save $8bn a year.”
The changes would still prevent double taxation but could affect older Australians who rely on franking credit refunds as a source of income — if the changes are not grandfathered.
Labor’s proposed changes to franking credits coincide with their other changes to tax law, including changes to negative gearing, lowering the capital gains tax (CGT) incentive to invest for longer than one year, changes to family trusts and increases to the highest marginal tax rates.
Takeaway
While some of the changes might be tough to stomach, Australia’s Labor party appear to have some bold plans for tackling our budget deficit. Personally, I think some of the changes may be a very hard sell to Australia’s voting shareholders.
While there will be good and bad outcomes from the proposed change to franking credits, whatever happens at the next election I think it’s important for policymakers to carefully consider the implications of the changes on Australia’s retirement population.
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