The current franking credit system:
- Companies pay up to 30% tax on dividends. If you are due a $100 dividend, you may receive only $70 – if the company paid 30% tax, i.e. $30 in this example. This is commonly referred to as a “fully franked dividend” and the $30 is the “franking credit”.
- You lodge your tax return. If you pay no tax, then currently you would get a $30 refund from the ATO – because your franking credit is “refundable”. If you pay tax between 0% and 29%, you get a partial refund. If you pay 30% tax, you get no refund. If your personal top tax rate is more than 30%, you need to pay extra tax on your dividend, but the $30 paid by the company is given as a “credit” against the total tax you have to pay
What Labor proposes:
- Labor want to make franking credits “non-refundable”. This means, only people who pay tax will in future get a partial or full credit for their franking credits.
Labor calls this “closing a loophole” and “a fairer tax system”. Below is some additional information so you can decide if Labor’s policy is indeed closing a loophole and making the tax system fairer.
What this means for you:
The majority of people who pay no tax or little tax are those in retirement. If your retirement income is so low that you also qualify fully or partly for the aged pension or other government allowance such as carers and disability support pension, unemployed and parenting payment, then you may be exempt from Labor’s proposal.
If your superfund balance exceeds $1.6 million, Labor’s policy will also have no or very little effect on you. A superfund member with a balance in excess of $1.6 million pays tax – and if you pay tax you will still get the full or partial franking credit. This enables you to reduce your tax potentially to zero (depends on how much tax you pay and how much you get in franking credits).
If you are a member of a retail or industry superfund, you will also not be affected. These superfunds have thousands of non-retired members and therefore pay tax. They get to keep their franking credits as well.
But if you are a retiree with a SMSF and a super balance of less than $1.6 million, you will lose your franking credits under Labor’s policy. Labor calls this “closing a loophole” – even though thousands of retirees in retail and industry superfunds effectively get to keep their franking credits because these superfunds always pay tax.
Coming back to our example of the $100 dividend: Remember that the company pays you $70 and currently you reclaim $30 from the ATO through your tax return. Under Labor’s policy, the ATO will in future keep the $30, i.e.
in future you will effectively pay $30 tax on that dividend.
Those retirees who are not poor enough to get a government pension/allowance but not rich enough to have to pay direct tax on their retirement income will in future be taxed indirectly at 30%. Labor calls this a “fairer tax system” than the one we currently have.
So what can we do?
If you think the above is not “fair”, please attend one of the public meetings next Monday. Even if you do not want to stand up and speak in public, it will be helpful if you can be there. The more people attend these public meetings the better a chance we have against this proposed policy.