Shorten’s tax grab will hurt all

Bruce Brammall, 14 March, 2018, Eureka Report

Seizemic activity

SUMMARY: Labor’s plan to axe excess imputation credit refunds would have a seismic impact on DIY super investors.

Ending the refund of excess franking credits would redraw the boundaries for investing for Australia’s DIY army.

More broadly, it would negatively affect almost anyone with a super fund – not just the wealthiest self-managed super fund members.

And lower-earning self-funded retirees, who hold companies paying franked dividends, are probably going to be hit the hardest.

Labor’s plan would end the refunding of excess imputation credits to individuals. Labor says it would save $5.6 billion a year.

The Tax Institute said the announcement should not have come as a shock to anyone. It was “the politically low-hanging fruit – easily done with minimum legislative change, saves a bundle in revenue and causes relatively minimal damage to Labor’s natural constituency.”

Labor’s real target appears to be the wealthiest SMSFs, particularly those who are in pension phase, who have previously received every cent back of the franking credits paid by the companies they own.

I didn’t see any mention of this in the media yesterday, but because of the $1.6 million transfer balance cap, this is no longer the case. The largest super funds – the ones that Labor was saying were getting $2.5 million in franking credit refunds – will have been getting lower refunds from the current financial year onwards, because of the introduction of the TBC.

But the impact will be felt far more broadly across super funds. Super funds in accumulation phase pay tax at a maximum of 15% – therefore, depending on their individual investments, it has the potential to impact almost all super funds.

How does it work?

Most Australian companies are taxed at 30%. Not all companies pay the full 30% tax on their whole earnings. But for the purpose of today, we will focus on “fully franked” dividends – meaning the full rate has been paid on the profits distributed to shareholders as dividends.

When a fully franked dividend is paid, it comes with a tax credit for that 30% of tax that was paid by the company.

So, therefore, if you receive a $700 fully franked dividend, it really means that $1000 has been earned, with $300 tax already paid. The investor receives the $700 dividend, with a “franking credit” for the other $300.

What happens to that $300 will then depend on the sort of taxpayer you are and what your marginal tax rate is.

Here are a few examples of what happens currently:

  • A SMSF in pension phase pays no tax. So, depending on the fund’s other liabilities, they will likely see the whole $300 in franking credits returned to them.
  • A SMSF in accumulation phase pays tax at 15%, so they would get up to half of franking credit back, or $150.
  • Many low-income earners below the $18,200 would get a full refund of the franking credits.
  • Those earning up to $37,000, whose marginal tax rate is between 19% and 21%, would get a portion of the credits back.

A low-income earner (retired pensioner, a non-working spouse) receiving, say, $10,000 a year in fully franked dividends as their only income would get a tax return of $4285, made up of franking credits. Under Labor’s announcement, this would no longer be returned to them. That’s a sizeable portion of their income that would be gone.

What Labor is proposing

Franking credits will still exist. You can use the franking credits to offset your other tax liabilities, but no longer would you be able to get a refund for excess franking credits.

So, if you’re overall tax position is such that the franking credits would have given you a tax refund, this would be lost under Labor’s proposal.

Labor’s announcement claimed that some of the wealthiest SMSFs in pension are getting up to $2.5m in franking credits returned to them each year. On average, they said, the top 10% of super funds are having in excess of $80,000 returned. As stated above, the introduction of the TBC means these types of tax returns are no longer accurate.

Nonetheless, they are big numbers. But it’s the smaller investors who will be hit hardest. As above, the investor earning $10,000 in fully franked dividends, who gets $4285 in their tax return each year, will have suffered a real drop in their income of 30%.

Governments would get to keep at least 30% of the tax paid by companies. At the moment, they are often handing good portions of that back to lower-tax investors.

What would happen?

It would cause a change in the way many people and super funds invest in a way that would register seismically.

When a SMSF is looking to invest in a listed company, the income being produced by that company is almost always a consideration. At the same time, the franking of dividends would at least be noted.

If super funds are not going to have those credits returned to them, fully franked dividends become less valuable. Their appeal will drop.

The relative appeal of other investments will increase. Investments where income distributions are not taxed at the corporate tax rate of 30% will become more appealing.

This would include investments such as real estate investment trusts, direct property and fixed-interest investments. Income from these investments are generally not taxed before being passed on to the investor.

As many experts noted yesterday, this is likely to put upwards pressure on property prices.

It would also have an impact on company buybacks, which are often loaded up with franking credits and often heavily taken by SMSFs in pensions.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: . Bruce’s sixth book, Mortgages Made Easy, is available now.


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