Note: A version of this article was first published in April 2018. We have updated this article with further detail on the ALP’s proposed ban on excess franking credits refunds.
On 13 March 2018, the leader of the Opposition (Australian Labor Party) drew an ideological line in the economic sands and threatened the lifestyles of Australian retirees (including SMSF members), other direct share investors, and low-income Australians.
Taking effect from 1 July 2019, Bill Shorten (on behalf of the ALP) promises that his party will ban cash tax refunds for excess franking credits (I explain what these are later in the article). Of course, such an outlandish promise can only happen if a federal election is held in early 2019, or if the ALP intends to introduce retrospective legislation. The ambitious promise is also subject to the Australian Labor Party (ALP) winning the next election.
On 27 March 2018, Bill Shorten and his shadow treasurer, Chris Bowen, revised the ALP’s ban on excess franking credits, which had only been announced two weeks earlier. Instead, the ALP’s ban on excess franking credits will now exclude any Australian receiving a federal government pension or allowance, who also holds Australian shares. The ALP call this change of heart, ‘The Pensioner Guarantee’, and the ALP promises pensioners, including Age Pensioners, “will be protected from the abolition of cash refunds for excess dividend imputation credits”. The Pensioner Guarantee also applies to an SMSF where one fund member, as at 28 March 2018, is a recipient of a government pension (such as the Age Pension).
This revised announcement confirms that the ALP is specifically targeting SMSF trustees. In the original announcement, the ALP had already protected charities and not-for-profit institutions (such as universities) from the proposed ban on excess franking credits, which means SMSF trustees and other self-funded retirees are the main targets for the new ‘tax’. Perhaps the ALP should call it the ‘SMSF tax’ or the ‘self-funded retiree’ tax.
Shorten suggest franking credits refunds are quasi ‘welfare’ payments
More recently, as reported in the Australian Financial Review (12 October 2018), Bill Shorten was quoted as saying: “Having a non-means tested government payment solely on the criteria that you own shares and giving people a refund when you haven’t actually paid income tax for the year that the refund covers, what’s the economic theory behind that?”
I can confidently suggest that Bill Shorten may need to get tax and investment lessons if that is his understanding of how franking credits work. He is also in denial if he believes such a statement will fly as justification for banning the refunds of excess franking credits. In simple language, excess franking credits are merely a consequence of paying too much tax for the amount of taxable income a person earns. Not refunding excess credits means those taxpayers, in particular, lower-income taxpayers, are paying more tax on their income than other taxpayers with similar levels of income.
Note: For an excellent analysis of how a ban on excess franking credits refunds will hit lower-income Australians, especially lower-income retirees, see our SuperGuide article (written by SuperGuidesubscriber, Jim Bonham), ALP’s franking credits policy targets shareholders with low taxable incomes.
Later in this article, we also have reproduced an opinion piece from Bill Shorten. The ALP has not made Mr Shorten’s original speech publicly available, although on shadow treasurer Chris Bowen’s website, you can access the original media release, and a policy document on the proposal, and a subsequent sequence of media releases and clarifications on the proposed change, which hints at a ‘policy on the run’ approach.
Background on franked dividends: A fully franked dividend is a dividend on an Australian share that has already had 30% tax paid on the income (although some smaller companies only pay 27.5% income tax). The pre-paid tax on a dividend is known as a franking credit that can then be used to reduce the income tax an individual, or a super fund has to pay on income. Super funds can credit the pre-paid tax against tax payable on fund income. Individuals can credit the pre-paid tax against tax payable on personal income, and a tax refund if the franking credits are greater than the income tax payable. A super fund in retirement phase pays no tax on any earnings funding pension income, which means the fund can claim a tax refund for any franking credits (for more information on franking credits, see SuperGuide article Franked dividends and franking credits: How do they work?).
Our SuperGuide readers have already responded strongly to Mr Shorten’s announcement, and we have published fuller responses from two of our subscribers, Colin Potts and Jim Bonham, and briefer comments from another subscriber, Donald. Jim’s reaction is set out in the SuperGuide articles ALP’s franking credits policy targets shareholders with low taxable incomes and Guest contributor: ALP’s plan to confiscate franking credits hits retirees, and Colin’s response is set out below, followed by Donald’s comments.
Note: SuperGuide will be closely monitoring this disturbing proposal, and other plans the ALP (and the Liberals) have for your super benefits. According to an article in the Australian Financial Review (‘Labor proposal to ditch franking credit cash rebates: Financial planners respond’, published 16 March 2018), the ALP is proposing making further cuts to the contributions caps, and also plans to restrict the opportunity to make tax-deductible super contributions (more on any future proposals in later articles).
Over the next few months, and as we move closer to the 2019 Federal Election, SuperGuide will provide comprehensive coverage (and analysis) of superannuation and retirement-related election policies from all political parties.
I question the viability of my SMSF (if the ALP’s franking credits policy goes ahead)…
One of the main objectives of the ALP’s proposed ban on excess franking credits is to restrict the viability and popularity of self-managed super funds. Personally, I have serious concerns with an ideologically motivated tax measure that requires a tax (or tax benefit) to be applied inconsistently across the population – note, that if you have income tax payable, you can still take advantage of the franking credits regime, up to the amount of tax payable. Low-income earning shareholders, including zero-tax paying shareholders, will also lose the opportunity to receive cash tax refunds of excess franking credits, unless they are receiving a government pension or allowance (for more detail on the impact on lower-income earners, see SuperGuide article ALP’s franking credits policy targets shareholders with low taxable incomes).
SuperGuide subscriber, Colin Potts, wrote the following email to the SuperGuide team, explaining the impact of such a ban on his SMSF:
For more information…
For more information on the ALP’s proposed policy banning cash refunds for excess franking credits, see the following SuperGuide articles:
