Even in defeat, many Labor rank-and-file members and their leaders are arguing the merit of some of their tax policies taken to the election.
Especially the franking credits policy. There are those who lament the ‘loss’ of revenue as a result of franking credits refundability now remaining intact under a Coalition government. For example, Anthony Albanese said on the ABC’s 7.30 Report just two days after the election, “the fact is that $6 billion [per year] is a lot of money”, not completely ruling out Labor’s franking credits policy in future.
Was the policy worth it?
Refundable franking credits have not risen 10-fold
Labor consistently claimed during the election campaign that refunding franking credits is unsustainable because the amount has increased more than 10-fold from $550 million in 2000/01 to $6 billion a year, and rising. But is there any substance to that claim? What’s the basis for these numbers?
The $6 billion a year claim was the result of Treasury analysis that revealed $5.9 billion worth of franking credits was refunded in the 2014/15 financial year.
According to Treasury documents, in 2014/15, $47.5 billion worth of franking credits were distributed in Australia. Of that amount, $23.5 billion were eligible for franking credit refunds, either in the form of cash or as offsets to tax liabilities. The other $24.2 billion was distributed to foreign owners and Australian companies, which are not eligible for refunds.
Of the $23.5 billion in franking credits eligible for refunds, $5.9 billion was returned in cash and $17.6 billion was used to offset tax liabilities. Of the $5.9 billion returned in cash:
- $2.3 billion was returned to individual investors outside superannuation funds
- $2.6 billion to SMSFs
- $0.3 billion to other super (including industry super funds)
- $0.7 billion to tax-exempt entities.
So for a start, that’s only $2.6 billion to the main targets, SMSFs.
The $23.5 billion is just over three times more than the $7.6 billion of refundable franking credits distributed in 2000/01. A larger economy and a considerable increase in investment activity in Australia since 2000/01 would have contributed largely to that growth in Australian equities and distributed franking credits, but that would not be the sole contributor.
Prior to 2007/08, both the percentage of refundable franking credits received by super funds and the percentage actually refunded as cash grew modestly from a negligible base in 2000/01. Then when the tax exemption of superannuation earnings in pension phase was introduced in 2007/08, growth in SMSFs and super fund investments increased sharply. And this saw the average franking credits refunded as a percentage of credits received by SMSFs increase from 35% pre 2007/08 to 60% post 2007/08. Almost double. Therefore approximately half of the $2.6 billion cash refunded to SMSFs in 2014/15 could be attributable to the enhanced tax-preferred treatment of super, being $1.3 billion.
Also, there were significant changes to individual tax rates and thresholds post 2006/07 that would have contributed to an increase in refundability. The lower the tax rates, the less tax to offset franking credits against, and hence the higher the amount refunded. And average cash refunds to individual investors as a percentage of total eligible franking credit refunds grew from 10% prior to 2006/07 to 15% post. A 50% increase. So of the $2.3 billion cash refunded to individuals in 2014/15, approximately $0.8 billion would be due to lower tax scales.
Therefore, strip out $1.3 billion for abnormal super growth plus $0.8 billion for lower tax scales, and cash refunds grew from $0.55 billion to $3.8 billion in adjusted terms. Then finally, adjusting the $3.8 billion for inflation (average inflation rate of 2.7% over 14 years) brings the increase to just $2.6 billion in 2000/01 dollars.
Other reasons to doubt the numbers
The $1.6 million transfer balance cap for SMSFs was introduced in 2017/18, well after the numbers on which Labor’s calculations are based. The cap has directed funds out of pension phase super accounts into accumulation accounts or other investments. The effect is a reduction in franking credits refunded as cash since 2017/18, all else being equal, as refunds can be used by large SMSFs.
And all this before the many other ways available to retain franking credit refunds or mitigate the impact.
Therefore, when Labor claimed that cash refunds on franked dividends are costing the budget $6 billion a year, an increase from just $550 million a year in 2001, and that its removal would improve the budget bottom line by $58 billion over the decade, the claim appears highly exaggerated.
Tony Dillon is a recently-retired actuary, with no affiliation with any political party.