Dividend Franking Credits and Labor’s Policy to Remove Refunds

The thread below evolved on Twitter yesterday and it made me realise that:

  1. Not everyone understands Dividend Imputation
  2. There are some elements of Labors plan to cut Dividend Imputation Credit refunds that might be unfair to a small group of people

Current info (as at 31/1/19) from the Australian Taxation Office about franking is at https://www.ato.gov.au/individuals/investing/in-detail/investing-in-shares/refunding-franking-credits—individuals/

What it essentially means is that anyone earning an income and is on less than the corporate tax rate gets to offset some of their personal tax liability with the franking credits. At the moment, in the below examples, Persons A and C still get tax refunds of some of the franking credits.

DescriptionPerson APerson BPerson CPerson D
Salary/Wages$18,000$30,000$30,000$0
Tax Payable$0-$2,242-$2,242$0
Fully franked dividends$10,000$0$10,000$10,000
Value of Franking Credit$4,285$0$4,285$4,285
Net Income$32,285$27,758$42,043$14,285

My understanding is that, under Labor’s plan, person C will still get a refund of some of the tax credits, whilst Persons A and D would lose the refund of $4,285. Neither of those people could be considered wealthy based on the numbers above.

As soon as Person C stops working, they lose the ability to claim those excess franking credits.

One comment on the Twitter thread was that “anyone with $200,000 worth of shares is wealthy”.

As with everything, the bigger picture needs to be taken into account. For example:

  • If that person bought their shares in a float 20 or 30 years ago and took advantage of Dividend Reinvestment, then they may have only invested a relatively small amount of money
  • If they are now forced to sell their shares they have to pay capital gains tax on their shares when they sell them and they lose the benefit of the dividends
  • If that person did not seek sound financial advice (or if they sought unsound financial advice from a bank or other predator…) during their working career and is retiring (or made redundant) then they may not have invested in the most tax advantageous manner (i.e. Superannuation)

Meanwhile, the wealthy have poured (and can continue to pour) stacks of money into superannuation and can receive their income, tax free – https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/tax-and-super

My point is simply that a blanket rule change can unduly affect the less well off in society, whilst the rich still have big super accounts and other investment structures that mean they won’t pay much, if any tax anyway.

I think if Labor introduced a modest means test, especially for renters that don’t own any investment assets, then that would be a good thing and allay the fears of many.

With that said, cancelling the dividend refund will simply encourage the rich to put more funds into superannuation or other tax advantaged structures and investments.

Please note, I am not an investment advisor or qualified accountant. I don’t have a big share portfolio and have spent 20 years running a business that isn’t likely to be worth much if I can ever retire. I do have a discretionary family trust which was meant to be used to build family wealth in, but the first 15 years of business put us significantly behind. I should have just rorted the government as a contractor and I’d have earned 2-3 times as much money in the last 15 years. I’m just really frustrated by our current crop of political leaders that release policies that are unfair on some whilst the rich just keep getting richer due to their political influence. I really hope Labor remembers to represent everyone and doesn’t bow to the unions as has happened in the past.

What Can We do Individually?

I was asked last week to do an impromptu presentation about sustainability to my drama impro class.

Afterwards, I received some great feedback that indicated I may actually have a bit of knowledge about the subject.

I was also asked what the average person can do.  My initial response is “it’s too late for the average person to do much.  We need massive, concerted action.  However, it then occurred to me that the average person might not know where to start with massive action, so here are my tips:

Plastic Pollution

  • Choose products with less packaging
  • Recycle as much as possible
  • Soft plastics can be recycled at Coles and Woolworths (?)
  • Choose shops that use biodegradeable plastic bags (Aldi??, ???)

Climate Change

  • Run airconditioners a couple of degrees higher than you’d prefer and heaters a couple of degrees lower than you prefer
  • Put up with a bit of discomfort if you can. We (my family) haven’t really enjoyed the last few weeks of hot weather, but we’re all still alive.  Water sprays and fans are much cheaper to run than air conditioners
  • If you need to run an air conditioner, cool the smallest area you can – there’s no point in running air conditioners to cool rooms that nobody is using
  • Try shading parts of the house – bricks and roof tiles heat up much more from direct sunlight than ambient temperature
  • Make effective use of insulation and draft stoppers.  Consider double glazing.
  • Drive the car less
  • It would be fantastic if everyone could afford to buy an electric/hydrogen/zero emission vehicle, but they are all still far too expensive. In the meantime:
    • Don’t buy a new ICE (internal combustion engine) car. There are so many 2nd hand vehicles in Australia, there will be something to get you through the next few years
    • It’s always been said a new car loses 10% of its value as soon as it’s driven off the lot and then they lose about 10-20% of value a year. ICE vehicles are going to lose value much faster than that in the next 10-20 years.  Especially big petrol guzzlers.  If you must buy a new ICE vehicle, pick a hybrid or vehicle with good fuel consumption if possible
    • The only real reason for having high capacity engine vehicles that use lots of fuel is if you run a business that needs to transport equipment or goods
    • If you love camping and/or other recreational pursuits that require a large vehicle, consider whether you can share a large vehicle with someone else and use a smaller vehicle for day to day commuting.  If you go camping twice a year, rent a 4WD for those trips – it will likely be cheaper than driving that 4WD all year round
    • If you do need a petrol/diesel powered vehicle, consider if you can buy bio-diesel or somehow offset your emissions.  An average vehicle uses between 3 and 5 tonnes of CO2 every year based on 13000km travelled. 
    • It is estimated that it takes 30-40 years for a tree to grow big enough to have absorbed 1 tonne of CO2 during the entire 30-40 years.  So, to offset 5 tonnes of CO2 produced by a vehicle each year, 5 trees would need to be planted and survive for 30-40 years.  Consider subscribing to a carbon offset service such as https://cncf.com.au/donate-a-tree/ which plants native trees. However, various studies have shown that the entire Earth can’t plant enough trees each year to offsite emissions – we HAVE to reduce emissions massively
    • Look for more efficient electrical products
    • Consider not buying yet another TV, computer, laptop, tablet, etc.  Every device that is manufactured, uses energy in the manufacture and shipping.  Most of that energy is currently supplied by fossil fuels

Money – choose where to spend it more wisely

  • Why buy a $1500 iPhone when a $200 LG phone provides the same functionality? Imagine if everyone chose the LG phone and invested the remaining $1300 in a company investing in sustainable energy or even spent the extra on solar panels for their house?
  • When you buy a $1500 phone on a plan, you’re still spending $1500, they are just letting you pay it off over time.  Isn’t it better to spend $200 over 2 years than $1500 over 2 years?
  • If you can’t afford to invest $1300 for every $1500 worth of value, you can’t afford an iPhone.  The Earth, your kids, the animal world and future generations can’t afford your iPhone
  • Become a producer before a consumer.  Buy sustainable energy generation before you decide to spend energy on air conditioning.  Imagine if we all thought about the whole lifecycle of the product we were buying and then made smart decisions before buying consumption products
  • Review your superannuation investments.  Consider moving them from default funds to ethical funds such as https://www.myfuturesuper.com.au or https://www.australianethical.com.au/
  • The more money we deny the fossil fuel industries, the quicker they are going to close shop

International business

  • Foreign companies invest money in Australia because they want to take more out of it. Every time you buy a product made overseas, some of the money you spend goes overseas.  For many products (cars, electronics), most of the money goes overseas.
  • Many large Australian companies are partly or completely owned by overseas interests.  In many cases, these companies make use of loopholes to transfer money out of the country as expenses to the locally operated companies, reducing or eliminating their need to pay tax in Australia.  If you buy your electricity or phone services from one of these countries, consider if it makes sense to switch to an Australian company
  • However, even publicly listed Australian companies often have large overseas shareholders, so many of the profits still leave Australia as dividends paid to shareholders.  One good aspect of this is that tax paid on those dividends is not refundable or counted as a tax credit to the overseas shareholders

Politics

  • Most of us hate or ignore politics.  However, these people are the ones making decisions and laws on our behalf
  • Preferences are not understood by many.  One of the Queensland senators only received 19 votes.  But, he was part of a party that directed preferences to him, so he still ended up earning $200,000 a year and he is a fairly radical type that few people believe in or like (he also quit the party that directed the preferences to him)
  • Please:
  • Do not just vote the way you always have
  • Read about the policies of your preferred party/candidates and also the policies of the other parties/candidates
  • Read about successes, fails, lies and commitments made by the different candidates
  • Make sure you understand how preferences work.  If you don’t understand the preference system, investigate it or ask for assistance from the AEC representatives at the polling booths

Resources

https://www.michaelwest.com.au/ – website dedicated to highlighting large corporate shenanigans

https://cncf.com.au/ – A carbon neutral fund

https://www.myfuturesuper.com.au/  – Superannuation fund specialising in sustainable/ethical investments

https://www.australianethical.com.au/ – Superannuation fund specialising in sustainable/ethical investments

The Long Road to Social Media

I have enough trouble sorting my own thoughts out, let alone everyone elses.

Although I’ve had a Facebook account for over 10 years, I avoided using it as much as possible, firstly because I couldn’t wrap my head around the number of interactions going on and secondly because I never really know what to say. I’ve always wanted to avoid stirring up trouble and rocking the boat. I have enough trouble sorting my own thoughts out, let alone everyone elses.

However, last year I took the plunge and started posting the odd thing. 

In May I also created a Twitter account, which perhaps wasn’t the smartest thing to do. I’m now pretty much addicted to it.

But, be warned. I’m furious about so many social injustice and environmental issues, and my tweets reflect that.

I’ve got to the point where I think constantly about what is wrong with the world. I write stuff in essays, emails, business plans and the like, but never show anyone because my thoughts are just too big.

This mornings reading comes from Julian Burnside, a respected barrister. This article – http://www.julianburnside.com.au/how-the-world-decided-to-help-refugees/ makes so much sense about how we should close down Manus Island and Nauru. It costs US $650,000 per year, per refugee to keep them there. Large amounts of that figure go to the private companies that run the internment camps. Why do we do that? Because the current government has core principles of “minimising government” and “offshore detention”. Whilst I also would like less government, there is no point in minimising government if it costs us more, is in breach of our human rights obligations and is downright cruel.

Suppose you went on holiday overseas and ended up interned in a camp for 5+ years because you were in the wrong place at the wrong time. Now, imagine that happened to you because you were fleeing a war or something that might kill you or your family.

For those of you that have always voted Liberal Party of AustraliaNational Party Of Australia or one of those other right wing parties, please don’t just vote for them again because that is how you have always voted. Please do some reading about refugees, asylum seekers, global warming, the way the media operates, the cotton industry/Murray Darling Basin shennanigans, etc.

Many of these parties are no longer the parties they were 20-50 years ago. I urge you to rethink what your party of choice is, read widely about what they do and what the “other” side does.

We as a country need to stop thinking of our political parties the same way as we think of our sporting teams. These guys have real power over real people and they are hurting a hell of a lot of us.

If you do some reading and watch some videos of speeches from all sides of politics and still feel that you need to vote for the current government, then I thank you for doing so.

If you want to know how much this concerns me, I spend every day trying to decide if I can be a force for good on this planet or if I should remove myself from it to do my bit for climate change. The jury is still out as my best never seems to be good enough.