Labor’s campaign slogan is ‘A fair go for Australia’, so let’s have a fair go on franking. Some readers are disappointed that Cuffelinks has published many articles that are critical of Labor’s franking credits proposal, but we have not received one article making an expert case for Labor’s policy.
Note also that many articles have suggested alternative strategies if the policy is legislated, but the articles have not been criticising the policy.
Cuffelinks encourages comments from all perspectives, provided they are (fairly) respectful and constructive. What follows is an edited collection of comments made on our website in favour of Labor’s policy, and the article to which the comment relates.
Selection of edited comments
Chris, May 2, 2019
I know I’m in the minority here but how can investors seriously think that getting a cash refund is acceptable? If, as it’s being reported, people have “saved” for their retirement then how/why are they relying on the government to subsidise their retirement with franking credit refunds?
A segment on the 7.30 report last night featured a fellow in WA who retired several years ago with $500k in his SMSF. While his wife is still working, he’s upset that he’ll lose his refund. 1, I don’t know why anyone would think $500k is enough to retire on, 2 legislative risk applies to businesses as well as investments.
Maybe a little overweight in Aussie shares!
Furthermore, if one has saved for retirement, when is one expected to start selling down their investments to fund their lives? It seems like everyone interviewed wishes only to live on the income stream and not the capital. Since when was superannuation supposed to be an inheritance vault for the kids?
PeterT, May 3, 2019
The nonsensical situation where the government (which again, is almost alone in the world today, in doing this) imputes the corporate earnings of its BHPs, CBAs, Telstras, etc. to a demographic of shareholders who sit outside the taxation regime. And in so doing, the government implicitly elects to pay for roads and schools and hospitals, etc. without taking a clip from those corporate earnings. That, I’m afraid, is pure nonsense.
Imagine, for a minute – if you have never actually done this before – sitting down and trying to explain this bizarre practice to someone in another country. With a straight face. And set your stopwatch to see how long it is before the word “Greece” is mentioned…
You can acknowledge the nonsense, and the necessity for the status quo to change, but disagree on precisely how; fair enough. Numerous Cuffelinks readers have pointed out that the zero rate of tax paid by pension-phase superannuants is really what should be put under the microscope. My own view is that imputation is the issue, and that it makes no sense to impute the earnings of a corporate entity to an individual shareholder when virtually no other property or practice of that entity is similarly imputed. Or there is the Keating view, which Labor proposes to re-implement, where you tax every single dollar of corporate earnings just once, at a rate equal to the higher of the corporate tax rate and the shareholder’s marginal tax rate.
If you take the view that the status quo here must change, that the nonsense must end – and most, even if not all, do – then under any of the above three avenues of redress, (1) more tax is going to be collected AND retained from corporate earnings, and (2) superannuants, as well as other low-tax-rate shareholders, are going to have less money in their pocket. That’s going to sting those individuals, for sure, no question, although the amount of the sting will vary depending on how you move the needle and on which dial. Any change to the status quo is going to have consequences, positive or negative, for everyone. If you are someone for whom the change has negative consequences (and I personally am squarely in this camp, but luckily my world view extends beyond the end of my own nose) you can console yourself, perhaps, with the view that in a rational universe, the money you will lose is money you really should never have been given, and are really very lucky (in a Greek way) to have received, over the past two decades, since Howard/Costello made the changes.
Darrell Campbell, April 17, 2019 at 10:15 PM
When will the franking credit (SMSF) whingers acknowledge that they are a group of well-off people who are not “battlers who have struggled to save”. They have done well out of Govt Concessions, and who are receiving excess WELFARE franking credits. It is not rocket science…
Imputation means no double tax on dividends. You will still get this under Labors policy. This is what Imputation was meant to do.
This is all on the basis that the Govt gets 30% of company tax on profits, and shareholders get 70%. And the SMSF whingers want part of the 30% as well.
And even $10,000 in franking credits, means $600,000 in shares, and therefore probably $1m in SMSF. And we are supposed to shed tears for them??
Ian Arthur, April 17, 2019 at 4:48 PM
It is sad to see how few people seem to care about increased equality and fairness in Australia and that relatively affluent people are fixated getting money back on tax they haven’t paid. Personally I would like to see dental treatment added to the Medicare system. pre school made free as it is in much of Northern Europe. Our school system would be fairer if private schooling was not subsidised by the government, our health care system made more equitable if the government stopped subsidising private health. Government services require funding and removing much middle class welfare would make our country more equal and a better place to live.
Neil Parcel, March 28, 2019 at 5:09 PM
So you support not taxing a significant proportion of company profits. Surely not paying any tax is privilege enough for retirees. But then to put your hand in the pocket of other taxpayers and demand that the government should also give you the tax paid by the company is simply over the top. It is a rort that must be stopped.
If a retiree needs welfare support then do it via the welfare system. This is a loophole the largely benefits wealthy people and short-changes other taxpayers.
Peter C, March 31, 2019 at 6:04 PM
There is a myth going around that SMSF’s are treated differently to public offer funds. They are not and SMSF’s are not discriminated against. If a SMSF has 2 people in pension phase and 2 in accumulation phase, and their asset allocation is balanced the SMSF will utilise their imputation because they will reduce the income tax. Conversely if a retail, industry or corporate fund has the majority of their members in pension phase (some smaller ones do), and their investments are skewed to Aust stocks paying fully franked dividends, then they are in danger of losing some of their franking credits. What this shows is that all funds are treated the same and the proposals do not discriminate in favour or against any superannuation sector. This myth is busted.
Personally, I do not believe in negative income tax and the current law allows for negative income tax for retirees over 60. It’s time this was changed and the ALP proposal is a good first step.
David Wilson, March 7, 2019 at 3:23 PM
As an imminent retiree the proposed franking arrangements, if implemented, will cost me some income. However, on balance I believe Labor’s franking proposal is beneficial to the Australian population overall and I am willing to support it. We are simply not paying enough tax to pay for our necessary Gov’t services (medical, education etc).
SMSF fund members who are concerned about ‘losing’ franking credits should move to a retail or industry fund that facilitates them receiving full value.
Philip Carman, March 7, 2019 at 3:12 PM
Just shift your shares to a good platform super fund which will collect the cash refund for you. It beggars belief that you can’t work this out and yet still cling to being trustees of your SMSF – really?
Most who have an SMSF in pension mode will need to exit sooner rather than later due to costs, inconvenience and compliance issues, anyway, so this is actually an opportunity to test the better, cheaper and more convenient waters ahead of time. Accountants won’t like it, but life is full of change so they’ll have to get over it, just as everyone else does. When the facts change sensible change their tack. Others cling to their beliefs and cry “no fair”…
By all means leave your property and bonds in the SMSF, but get your shares out, try the alternative and then make the changes you will require anyway over next few years.
David, February 28, 2019 at 10:40 AM
There is no discrimination as the democracy principles are intact. A policy has been tabled prior to the election. The Australian public will vote, and a party will be elected to govern. The polls oscillating around 54-46 on a 2PP vote suggest this issue is of minor concern and further proof that the vested interest and lobby groups merely represent a minority view.
Peter Simpson, February 28, 2019 at 5:52 PM
These comments and many others I have read highlight the emotions arising when a loss is experienced. I am one who will be impacted by this but recognise that the current policy is unsustainable.
Good financial advice would see the impact minimised through diversification. What returns have been missed by over focusing on tax refunds?
I agree that the proposed changes along with others such as the $1.6m cap, reduced concessional and non concessional contributions have all impacted retirement planning. Constant change reduces confidence in long term planning and people providing for their retirement.
I would not seek to diminish the pain experienced by those affected but there is also a hysteria that seems to overstate the impact. More facts and considered planning options need to be reported and most large funds will have no problems as they have large accumulation FUM.
When I donate to charity I cannot claim a deduction against NIL tax and get a refund.
Tony, February 14, 2019 at 7:03 PM
I’m afraid this comment falls into the self interest category. Corporate tax is not a down payment on the shareholder’s tax. It is a separate and important source of revenue to the country. It cannot be looked at in isolation. And as proof just look at the amount of SMSFs invested into Australian shares just to receive the refund, most of which were set up to take advantage of this loophole. The tax free payments from super means most retirees do not pay tax and receive this refund. Another Costello folly.
It is a massive distortion of the tax system. In the extreme there would be no corporate tax paid, leaving a massive hole in the budget.
Paul, February 15, 2019 at 8:23 AM
The refund of imputation credits was about $500 million in 07-08. It was about $5 billion last year. If this Labor change does not happen and we continue down this path of some equities yielding 8-10% for retirees only, do we think this could lead to some pretty heavy imbalances in the market??not to mention the portfolios of retirees?
Might there be a problem if we have a GFC II event and the market drops 50% again?? What will the retirees who have massively over-invested in artificially high yielding equities do when their portfolio halves?
Jimmy, February 21, 2019 at 1:43 PM
Imputation was designed to stop dividends being taxed twice, once in the hands of the company & once in the hands of the investor. If the investor is paying no tax and also gets a refund of the tax paid by the company then the base from which tax is to be generated gets smaller & smaller as more boomers move into ‘pension’ phase.
If retirees are complaining that the health care system is failing, that their kids are being swamped by taxes & no benefits, that their grandkids arent getting proper funding in schools then they need to look at issues like this & recognise they are part of the problem.
Adam Shultz, January 29, 2019 at 11:02 AM
Labor have released their policies long before an election and regardless of whether you agree with particular policies or not, it is to be commended that they are upfront with their agenda and priorities that they will pursue in Government.
As for the refunding of dividend imputation credits I believe Labor have been very clear that they see the current situation as unsustainable in the future. Bowen has been quoted as stating that, “In 2014-15, $5.9 billion was spend on refunding dividend imputation credits. In the same year the commonwealth government spent less than this on public schools at $5.2 billion.”
Bowen also states that, “Industry funds are treated the same way as retail and bank funds. And all these funds pay tax. Allowing them to use franking to offset that tax is a fundamental principle of avoiding double taxation. In fact, it is tax refunds to non-taxpaying SMSFs and individuals which is the anomaly in our tax system. No other element of our personal income tax system involves refundable credits. None.”
Pat Connelan, January 24, 2019 at 10:15 AM
The self-interested industry bleating over this issue is a wonder to behold. The fact is, as Professor Ken Davis is quoted as saying in The Australian today, dividend imputation was not intended to lead to zero taxation of corporate income which occurs when dividends are paid to investors on zero marginal tax rates and rebates paid. The other issue, as the article shows, is it is distorting older Australians’ asset allocation leading them to hold concentrated portfolios and seeking to game dividend payments by breaching the 45-day rule. The tail is wagging the dog, the system is unaffordable and it is creating massive distortions in the financial system. Why doesn’t Cuffelinks represent an alternative view on this issue instead of constantly singing from the hymn book of industry rent-seekers??
Mick Peach, January 3, 2019 at 9:45 PM
If you own part of a company, you pay company tax – end of story. If those earnings are included with other income for tax purposes and that results in you paying more than the company rate for that portion then you should get the difference back, but not otherwise.
Can’t recall anyone complaining about the lack of payment of imputation credits prior to the change. Not a peep.
I remember when pension income was first exempted from paying any tax, I thought wow this is great, never thought I’d see that happen – but when they went further with the payment of credits I nearly fell off my chair thinking this is too good to be true. It is, get used to it.
Invest in something else besides banks, utilities, reits etc. you’ll be doing the economy a favour.
Philip Carman, November 18, 2018 at 12:25 PM
So many here seem to have missed a few important points.
The first issue is that companies in which you own shares are NOT YOU and you’ve made a deliberate choice to invest via a company usually because the whole point of companies is to limit liabilities – or in other words, to limit responsibility. So how you think that you can/should do that as well as gain all the benefits of direct ownership is perhaps a rather interesting example of deluded self-interest. The company pays the tax and Paul Keating (just ask him, he’ll tell) saw that there was a potential for double taxation AND an opportunity to bring Mums and Dads into a broader share ownership culture (just ask him – he’ll tell you) so he led the world in “tax reform”…but that was then cynically abused a decade later, when…
The Howard/Costello trick was used as a vote winner at a time when that government’s popularity was fading and it worked a treat. Always back the horse in the race named “Self-Interest” – you know it will be trying! Who said that?
Fred Woollard, November 8, 2018 at 1:43 PM
I also feel strongly about this. The submission I would like to make is below. The biased website refused to lodge my submission unless I agreed to support their petition.
Attention: Tim Wilson MP (Chair) & Committee members,
As a fund manager and investor, I support the abolition of cash refunds of fully franked dividends.
There are much better uses of government money than giving money to investors. Schools and hospitals are obvious examples.
It is not hard to rebalance one’s portfolio away from shares if this causes a problem. A competent stockbroker should be able to advise on this.
The impact of Labor’s tax change has been thought through. It should be supported.
Dean, November 9, 2018 at 12:44 PM
The tax benefits of franking credits have encouraged many SMSF trustees to invest in highly concentrated portfolios of Australian shares. This may be great when things go well in that narrow segment of the investable universe, but it is quite risky.
Union super funds are far more diversified and as a result have other sources of income against which franking credits can be offset. “Identical portfolios” is a moot point because their portfolios are quite different.
While I don’t accept that Labor’s proposal is logically consistent, if it encourages SMSF trustees to adjust their asset allocation away from an intense concentration on Australian shares it’s ultimately a good outcome.
Dane, October 4, 2018 at 5:15 PM
The whole point of the original dividend imputation system introduced by Keating was to remove ‘double taxation’ so that taxpayers wouldn’t pay tax at their MTR in addition to the tax already paid by the company at 30%. Then Costello came along and changed the system in search of the grey vote to allow excess franking credits to be refunded to 0% taxpayers at a substantial cost to the budget. ($4.6bn 2012-13). These ‘çashbacks’ were not part original design of the policy but were funded by a spike in national income during the mining boom years. Now this is over it has left us with a large permanent structural budget costs (see above). Dividend imputation is unusual in itself in that only 4 countries on earth do it. But none go and step further like we do with excess franking credits..
At the end of the day it about what is fair and sustainable. Costello should never have changed the dividend imputation rules in the first place, and should only have permitted investors to offset franking credits against tax that they have paid. This was the initial rationale behind dividend imputation – i.e. that tax gets paid on company profits, but not twice over when paid out as dividends.
Pat Connelan, June 7, 2018 at 2:53 PM
To the battler with the $1 million super account, $40K in dividends a year and complaining about not getting a ‘refund’ for unused franking credits, I suggest he talks to a 25-year-old university graduate looking for a job and trying to survive on Newstart. Honestly, the revolution can’t come soon enough for the entitled whingers on this website.
Pat Connelan, June 7, 2018 at 6:40 PM
The truth is the refund policy was an expensive, unsustainable and fiscally irresponsible in the first place. It was a giveaway by Howard and Costello when they had money coming out of their ears to pay homage to the ‘self-funded’ retiree constituency of pigs at the trough. Now these entitled blowhards are squealing because the Labor Party is trying to reintroduce some equity to the country, while reining in a cost that escalating to tens of billions of dollars a year. And these people complaining have ample savings. They are just too greedy to actually spend them down and want to use their fat superannuation pile as an estate planning device. Meanwhile, our kids’ generation are having to shoulder every single risk without any help from the government. They carry student debt, are shut out of the housing market (because ‘self-funded’ retirees are negatively geared up into multiple ‘investment properties) and will inevitably face a future with none of the unfunded middle class welfare that has spoiled our generation of boomers.
Tony, May 31, 2018 at 6:59 PM
Noel I think you missed the main point. Company tax is paid by companies. Dividend imputation was designed to ensure that the company tax paid on profits was not double taxed in the hands of shareholders receiving dividends To achieve this, imputation credits were introduced, meaning that only those who paid more than 30% income tax were taxed on their dividends.
The existing situation whereby imputation credits are refunded means that company tax is diluted. That was never the intention of dividend imputation.
The loophole has been exploited by the well off, mainly through SMSFs and non working spouses. It is unsustainable and inequitable.
Phil, June 4, 2018 at 11:12 AM
All Labour is proposing is changing the law as in their view more tax needs to be raised to fund deficits, repay ever increasing debt levels. So it’s what side you sit in terms of self interest or greater good I guess. But the argument gets complex as ever, we have people wanting Apple to pay more tax here as they pay none, but don’t want to give up their franking refunds. It might be a tenuous link but I find it interesting.
Copernicus, June 4, 2018 at 10:00 AM
While everyone quibbles over an exta 1.5% p.a. from franking credits, portfolios are being decimated by a slavish focus on investing purely for tax reasons, which has the average portfolio heavily overweight Banks + Telstra. This is not a prudent investment strategy. The consequences have been on show with large amounts of volatility in the capital component, which has wiped out any benefits from franking credits many times over. The excess refunds of franking credits appears to be distorted investor behaviour to their detriment.
C’mon people. Use this as an opportunity to do some homework and look beyond a market that represents less 2% of the world, dominated by sectors that are over-invested in the past..
Gen Y, March 15, 2018 at 11:20 AM
There’s no doubt in my mind this policy change is for the greater good. The vested interest groups (ie the Wealth Management industry) will cry poor but the 0% tax on pension income and drawings introduced as part of the final splurge by the Howard administration are simply sucking too much taxation revenue out of the system.
Secondly the high dividend payout rations encouraged by the generous imputation credit regime are also putting a handbrake on company investment in this country. Reducing the incentives for paying out 70% of profits of dividends will see this income re-invested, creating jobs and economic growth.
The risk to property prices is a real one, but that horse bolted 20 years ago. Why the current concern about rising property prices when everyone has turned a blind eye for so long.
Geoff, April 26, 2018 at 12:24 PM
I do not understand how some people get the idea that company tax is a tax paid on behalf of shareholders. It is not. Company tax is a tax levied on company profits under the company tax regime, simple as that. Keating’s original imputation system was designed purely to prevent the double taxing of the same “income” in the hands of shareholders, albeit that “income” is in a different form ie dividends rather than profits. It was never intended to provide refunds for shareholders.
For those thinking I have a biased view let me tell you I am a Liberal voter, a retired tax accountant and my SMSF receives tax refunds from unused franking credits. I just happen to think it is illogical for a Government to collect tax one year in the form of company tax and then pay some of that tax collected as a refund to some shareholders in a subsequent year when they themselves have not paid the tax! It becomes a form of welfare!
Philip, March 29, 2018 at 6:19 PM
There IS a BIG difference between an employee who has an employer pay tax on their behalf (at an estimated rate) and the employee later getting a refund when their tax rate is lower, and a shareholder and the refund of company tax paid at the standard rate. One gets tax back that’s owed to them by the ATO whereas the shareholder is a different entity to the company and is not entitled to any presumption as to what’s “owed”. AND the shareholder does not share any liability of the company (that’s what “limited liability” means and is why the company exists – to separate shareholders from the business and control of the company). So, they are about as alike as cows and seagulls (both are animals, but quite different) and can and should be treated differently. This proposal by Labor is long overdue and is a fairer treatment than the over-the-top generosity of the Howard/Costello nil tax on pensions and refund of company tax to (often wealthy) individuals who don’t pa tax on their income. The only mistake is removing the provision from Age Pensioners; it should simply have been capped at $1000pa max refund.