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.