You may have read in the media over the last week that Labor has announced that it would abolish imputation credit cash rebates for shareholders under Federal Labor's latest tax policy were it to be elected at the next Federal election.

Franking and Refunds Explained
Dividend imputation was introduced by the Hawke-Keating Labor government in 1987, to prevent so-called double taxation of company profits. This meant that shareholders did not need to pay tax on their dividends, for which the company had already paid tax.

But there was a shift in 2000, when the Howard-Costello Coalition government amended the policy, making it more generous for SMSFs and self-funded retirees - a policy which still exists today.

The effect of this change is that shareholders who pay no tax - or pay a lower rate of tax than the company (30 per cent) - can convert excess franking credits into cash refunds from the Australian Taxation Office. When companies pay dividends, they can include franking credits (or imputation credits) for shareholders who can then use it to offset their personal tax. Without franking credits, companies would be taxed on their profits, and individual shareholders would then be taxed on those same profits. If it is introduced in July next year, as Opposition Leader Bill Shorten hopes, it will be a massive change to the dividend franking system that was introduced by Paul Keating in the late 1980s and extended to include refunds for low rate taxpayers by John Howard nearly 20 years ago.

What Would This Mean For You?

The people most affected by Mr. Shorten's proposals will be individuals who pay little or no tax, given that the ability to use franking credits to offset taxable income will remain intact. Anyone whose tax liability is greater than the franking credits to which they would be entitled will not be affected. This includes members of large superannuation funds. Pooled, or traditional, super funds pay tax at the entity level and have sufficient tax liabilities across the fund, such as contributions and capital gains tax, against which the franking credits can be offset. This is the case regardless of whether the saver is still adding to their super in the accumulation phase or drawing a private pension.

And yes it does mean that fund members with pension accounts are effectively subsidising members with accumulation accounts.
The problem that self-managed super fund trustees find themselves in is that if they have a pension account – which by definition was commenced with less than $1.6 million of assets – they have no taxable income that can be used to offset the franking credits. Individuals who have reached the age pension age and are able to earn up to $29,000 tax-free under the seniors and pensioners tax offset (SAPTO) rules will also be affected.

Under the current system, of course, if these groups of investors own fully franked shares, they are able to claim a refund from the Tax Office for a sum that is equal to the amount of tax paid by the company. This can add between 10 per cent and 20 per cent to the amount of income derived from a share portfolio. Some commentators are saying that these changes if introduced would follow rather too quickly from the January 2017 changes to the means testing of the age pension. Those changes cut 100,000 retirees off from the age pension altogether and reduced the amount of age pension 300,000 more individuals were entitled to. The political argument about the policy centres on who would be most affected and how well off they are. Labor's policy said it would be wealthier retirees who are most likely to claim cash refunds because share ownership is highly concentrated amongst wealthier households. Opposition Leader Bill Shorten said half the benefits of the total benefits of the cash refund scheme go to the biggest 10 per cent of super funds which have balances above $2.4 million.

Finance Minister Mathias Cormann said Labor could not claim no-one would pay more tax when the policy raises $59 billion over 10 years. Senator Cormann called it a $59 billion tax hike. "More than a million retirees, many of them pensioners or part-pensioners, will pay more tax under this proposal," Senator Cormann said. The Opposition said its policy had been costed by the independent Parliamentary Budget Office (PBO). The ALP would not release the costing, but said the PBO found that the policy would save $11.4 billion in 2020-21 and 2021-22. Labor said charities and not-for-profit institutions, including universities, would be excluded from the change. The new system would start in July 2019 if Labor was to be elected at the next Federal Election which should occur early in 2019.

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