Labor’s Proposal to Shorten Franking Credit Cash Refunds
Current Labor leader Bill Shorten vowed in March 2018 that if Labor won the upcoming federal election, they would abolish cash refunds for excess imputation credits paid to superannuation funds and individuals.
That is, the dividend imputation policy formerly introduced in 2001 by the Howard government would be reversed, effectively allowing the original dividend imputation system to come in effect after 1 July 2019.
WHY HAS IT COME ABOUT?
The Labor Party has stated that the current dividend imputation system is forecast to cost the Australian federal government more than $56 billion over the next 10 years.
They have emphasised that the removal of the concession will make the tax system fairer by removing the opportunity for obtaining a cash refund from excess franking credits.
WHO IS LIKELY TO BE MOST AFFECTED?
The proposed changes will affect those self-managed superannuation funds (heavily invested in Australian shares) which are in pension phase.
This has been illustrated in the below example for “XYZ Superannuation Fund” which only has income from investments in ASX listed companies. We have illustrated the impact of the current law and the new proposal:
In addition, individuals who hold large sums of dividend-paying shares from Australian companies may no longer be entitled to the cash refunds formerly received from excess franking credits.
Those who have a tax liability that exceeds the franking credits to which they would be entitled will not be affected.
As part of the announcement, Bill Shorten has pledged for “The Pensioner Guarantee” which provides that pensioners will be protected from the proposed changes to dividend imputation.
That is, Australian government allowance recipients and pensioners will be exempt from the removal of cash refunds for excess dividend imputation credits as at 1 July 2019 when the policy is proposed to commence. This will include individuals receiving the Disability Support Pension, the Age Pension, Parenting Payment, Carer Payment, Sickness and Newstart Allowance.
WHERE TO GO FROM HERE?
Don’t panic! The proposed policy is a long way from becoming law so don’t rush out and start liquidating your investment assets.
Providing Labor win the upcoming federal election, the proposal will still need to be passed by the Senate (to become legislation) so it may become significantly delayed and we may see further changes requested by the minor parties.