How much would your Commonwealth Bank of Australia (ASX: CBA) or Telstra (ASX: TLS) shares worth without franking credits? How long is a piece of string?
What Are Franking (Imputation) Credits?
Franking credits were designed to avoid paying tax twice on a business’ profits and dividends.
Franking credits are attached to dividends where company tax has already been paid. For example, for every $1 of profit a company earns and pays a tax of 30% on (30 cents), it could then distribute this profit to shareholders with franking credits. For every 70 cents in dividends, it distributes to shareholders, a franking credit of 30 cents will be attached to it reflecting the company tax paid.
This means when a shareholder files their tax return for the year, for every 70 cents in dividends they received from the company, they are assessed as having paid 30 cents in tax on that income already. For someone in the top income bracket of 45%, they may need to pay another 17% in tax (15% income tax + 2% Medicare levy). Whereas someone who does not have to pay tax may receive a cash refund of the franking credit.
Labor’s Proposal For Franking Credits
Under Labor’s proposal, there will be no cash refunds for excess franking/imputation credits for individuals and superannuation funds. Franking/imputation credits would be a purely non-refundable tax offset, so if not used they will be forgone.
However, Labor has stated that some bodies/people will be exempt including:
- ATO-endorsed income tax exempt charities
- Not-for-profit institutions with deductible gift recipient status
- Pensioners
Rask Perspective
There is a lot of water to pass under the bridge before this happens so predicting the exact outcome on shares, such as Telstra or CBA, is impossible to know. While current odds have Labor as an 87% chance to win the next Federal election, if they get in the changes must be passed by the House of Representatives and the Senate.
We may not see it passed, or we may see it passed as a watered-down version with modifications. I see little point in speculating at this point in time, I’d prefer to adopt a wait and see approach and focus on buying shares of solid companies.
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