You are effectively being taxed between 1-18,200 but the tax rate is zero.
Question 1. No. Your tax is based on your income, including any dividends and franking credits. Any PAYG payments reduces the amount owed. Only at that point do you start to deal with franking credits. The proposal is that franking credits can only reduce your tax to zero and not below (Labor's policy looks set to treat low income earners differently).
Question 2. Raising the threshold to $18,200 removed many people, especially part time workers plus older and disadvantaged people, from the tax system where they were paying very little anyway and costing a lot in admin. It also effectively increased the income to those on lower incomes as they also raised to rate from 15% to 19% on incomes from 18,200 to 37,000? I think, can't be bothered to do the maths, that those on $37,000 effectively paid the same before and after the change. Those on less got a diminishing tax cut.
