Yesterday, the Opposition Leader revealed a new policy to abolish the ability for individuals to claim cash refunds on excess imputation credits that had not been applied to offset tax liabilities.
Mr Shorten said the abolition of the benefit – which was introduced by the Howard government following the Keating government’s establishment of the dividend imputation system in 1987 – would result in an additional $5.6 billion to the federal budget bottom line and reduce “unfair revenue leakage” that allegedly disadvantages voters in lower income brackets.
However, speaking to ifa, Michael Pinn, director of Sydney advice boutique Pinn Deavin and a former CPA and CA, said the policy would result in precisely the opposite.
“The policy of dividend imputation is fairly simple,” he said, explaining that shareholders may pay additional tax on dividends or receive a tax refund depending on whether their marginal tax rate is greater or lesser than the company rate.
“By denying the lower income tax rate taxpayer a chance for a refund of the imputation credits, Mr Shorten is actually denying a low income person the tax credit whilst still taking more tax off the higher income taxpayer,” Mr Pinn said.
“Imputation tax credits on dividends actually redistribute wealth to lower income investors and take wealth off higher income investors.
“Mr Shorten either doesn’t understand the practical implications of the policy or does not intend to use it.”
The AIOFP director and self-licensed adviser is not the only financial services industry participant that has opposed the proposal.
The FSC, ASFA and SMSF Association each issued statements arguing that Mr Shorten’s plan would adversely impact Australia’s retirement income system and penalise those who have worked towards becoming non-reliant on government welfare.
Of the mainstream superannuation industry representative groups, only Industry Super Australia (ISA) – whose members maintain close links to the labour movement – has come out in support of the proposal.
ISA chief David Whiteley described the move as sensible and called on the federal government to support the opposition proposal.
“It has been evident for several years that policy changes are needed to modernise the super system,” Mr Whiteley said.
“There is a need to make the system fairer and by reducing reliance on the aged pension, more economically sustainable.”
Commenting on the ISA position, Mr Pinn said these funds support the Labor proposal because “they use tax credits as ‘cash’. In the sharing of super fund profits they use imputation credits received to offset any contributions tax payable”.
“The only time it would become an issue for industry funds is if the contributions dropped and they were not able to offset the contributions tax liability against excess imputation credits received,” he said.
The actual announcement is here
https://www.alp.org.au/fairer_super_plan
Various media reports ignore that accounts with income deeming up to $75,000 are not affected.
The most important part is repeated here…
The proposed measure would reduce the tax-free concession available to people with annual superannuation incomes from earnings of more than $75,000. From 1 July 2017, future earnings on assets supporting income streams will be tax‑free up to $75,000 a year for each individual. Earnings above the $75,000 threshold will attract the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.
This measure will affect approximately 60,000 superannuation account holders with superannuation balances in excess of $1.5 million.
Importantly, the policy settings mean that this reform will not impact full or part aged pension as the basic income test for the aged pension (singles and partnered) is under the $75,000 threshold. Under the proposal, capital gains will be grandfathered.
Can someone clarify with authority the position of Fund Managers who have 50% clients in accumulation and 50% in pension mode, how are clients in each category affected, ie, suppose the fund manager investments overall are split 50:50 between franked and unfranked dividends received from all sources? Are clients segregated for tax treatment according to whether they are in accumulation mode or pension mode?
Big business doesn’t pay tax anyway. I am amazed that both sides of government want to raise tax revenue from any source other than by taxing foreign companies operating in Australia
Wow pure ignorance is bliss? Start doing research and you will see within the last 4 years a whole raft of new legislation addressing exactly that, resulting in increased revenue from that exact source. Any other banal comments you would like to make?
Sure the Govt. are making some effort to tax big business but they still get away with dodging huge amounts of tax or play the rules extremely hard, that are rubbish anyhow.
Or claim massive depreciation, eg. Gas exploration, etc.
How can Australia soon become one of the biggest world exporters of Gas yet one of the worlds smallest recipients of tax revenue from Gas exports? Madness, pure Madness!!
Not necessarily a bad thing. From a tax perspective, investors may then be forced to look at companies that have effective Growth strategies. That is companies that don’t focus on just paying out large dividends, but instead who are effective in reinvesting into their business. Let the market then decide who those companies are.
Given this is an age of ‘disruption’, maybe this is what is needed. The dividend-paying Oligopolies are being hounded by Amazon et al anyway. This might give them the kick up the pants they need.
Except for the fact that most of the older Australians don’t really have the capacity or knowledge to look into that, and not all feel they’re in a position to seek advice. Pretty broad and not well considered general statement you made, like saying let’s set fire to a house to get the termites, illogical.
Maybe those ‘older Australians’ need a good financial planner…Does anyone know any?
Proof that Shorten is nothing more than a puppet of the Industry Funds
Other way around I think you will find. Labor Party is a political instrument of union officials. “Industry Funds” are a financial instrument of union officials. Shorten is the chief union official.
Its got nothing to do with Super funds , retail or industry . I worked in Stockbroking as an employee, earned more than the prime minister and my only tax deduction was dry cleaning . I then became a self employed adviser and income split everything to my wife , 3 kids etc via a family trust . Is that fair ? NO . Shorten will stop family trusts . Stop whinging about a tax rort like the current arrangements that was designed to stop double taxing of dividends , not single taxing. I know clients who are spending $100 to get a tax return done just to claim $120 back on franking credits and they normally don’t pay any tax anyway . We need to tax more and cut both Government spending , raise interest rates to stop unrealistic house prices and immigration . Only problem is Labour won’t have the guts to do any.
Correct on all points, including the last one as it turns out.
Must be lovely living in La-La-Land with that reality filter. Just read the strong support the ISA has thrown behind this proposal and tell me it has nothing to do with them. Plus love how you mix a whole range of separate unrelated policy points with irrelevant personal information to somehow try to back an indefensible rant. Life must be extremely simple according to your generalised solution; or is it just you?
I have a small share portfolio and look forward to the franking credits to help make up my income and I know of many in my situation. The money is rightfully ours as it has been paid by the companies as their tax because I own some shares in that company and my tax rate is well below the company tax rate I am entitled to the difference If you over pay the tax man he gives it back doesn’t he .? Plus people on low income will be worse off. But those on high income ,, nothing changes. So it’s totlal unfair the High income earners. Will get a tax credit. In the form of less tax paid. But low income earners lose the credits …. this plan will only benefit the wealthy
Hmmmm. Is the reason you are on a low tax rate due to any of the following:
– You pay zero tax on any of your superannuation in pension phase?
– You pay a concessional tax rate due to SAPTO?
– You negatively gear investment property?
– You pay concessional tax on capital gains?
– You live in a home that is much bigger than you need in order to get a tax exemption and/or taxpayer funded Aged Pension handout?
If so, I don’t think you have a strong case based on “fairness”.
Wrong on all those points, bud. Even if the original writer has all those things you outlined, it means they have saved and sacrificed and paid tax all their lives (plus probably raised a decent hardworking family) and may not be considered ‘wealthy’ by anyone’s standard. [b]How dare you act indignant that they want to retain a tax refund[/b] on as they rightly state, has been overpaid on their behalf? Only a true socialist left winger would bemoan the fact they may get some benefit from those points, and yet this average scenario is exactly the working class Aussie that your ilk supposedly are representing. Labor and the unions have lost touch, and this policy proves it.
The tax was not paid on their behalf – it was the company’s tax bill paid on its own behalf as a separate legal entity. The shareholder is protected from paying that tax again by dividend imputation – but should not be paid a refund of tax that they never paid AND WAS NOT PAID ON THEIR BEHALF. People can be indignant about this -it was bad policy when introduced in 2000, is unaffordable now, and needs to be changed.
It is very simply abiding by the principal that the ultimate entity should pay the appropriate tax for their level of income, so if it wasn’t withheld via company income tax, the lower income owners would not pay income tax, so it is not a hand out, it is one of genuine systems that abides by true taxation principles that profits should be taxed once. Clearly obvious that Bill should be wearing big red boots and fuzzy coloured hair, he is over paid and under skilled and qualified to be in a position of such power….. ohhhh well actually he probably fits in perfectly in parliament hey 🙂
The cash payment from the ATO to non-taxpayers means that this proportion of the profits will not be taxed at all. Net to the Federal budget = 0.
That’s because in the ultimate financial beneficiary isn’t for whatever reason required to pay tax, most likely because they are receiving a Superannuation based income stream. If Shorten is upset about the interplay of income tax and the concessions available from Superannuation pensions, then he should go to the source and deal with Peter Costello’s tax free elephant in the room.
He won’t, not because it shouldn’t be done, but because it will lose too many votes… this isn’t about fiscal policy, this is about doing whatever you have to, to appeal to those who might vote for you, by attacking those who definitely won’t.
Next thing you know, the Labor party will be advocating to build a wall along the eastern seaboard to keep the Kiwis out..
Hold on. This cash refund was introduced by Howard/Costello and not part of the original imputation design. Since when are these things permanent?
When people all of a sudden have something to lose…
Both sides Liberal and Labour at the time agreed on the cash refund. So people back then have planned and saved under this rule and now the say it will change pretty unfair.
That’s true, but it’s also true that Labor took this exact policy to an election and the LNP subsequently brought in the same (#MeToo) policy after they won govt. So it’s disingenuous of Labor to be now pointing the finger at Howard/Costello when it was their policy also. They expect that the public will forget these things with the passing of time, so just treat us like mugs.
Mr Shorten’s proposal (and Industry Super Fund’s David Whitely’s enthusiastic support for it) is a cheap shot and a cynical political calculation. They’re essentially betting that their constituents will be so distracted with the usual class warfare sound bites that they’ll forget to do the maths. We’ll see.
No, they’re not. They’re trying to wind back some of the unnecessary and illogical cash giveaways of the Howard/Costello era. The Treasury suggested the current Government look at this but they are too busy trying to give away taxpayers money to foreign investors and big businesses.
That’s crap. This was also a policy of Labor’s at the time and wouldve been introduced by Beasley had he won the election.
“Please explain?” Your over generalisation leaves your argument in a weak position, and exposes your true political blinders.
For someone with supposedly expert knowledge of the superannuation system, David Whiteley demonstrates he is a light weight when he refers to the Age Pension system as the “aged pension”. It is important to be accurate when discussing such important matters.
What’s the difference?
One is the correct term and one isn’t.
Both are understood to mean the same thing and are used extensively. I don’t see either as being incorrect.
Using that logic I will start referring to Aged Care as Age Care from now on. Two different words with different meanings.
Wow! You got him there. He should immediately resign.
How can someone claim $2.5m (or even an average of $83k) of tax credit refunds when the new cap limits investment to $1.6m in the 0% tax pension environment – $83k would infer dividends of say $194k which would mean a yield of 12% based on 100% Australian, fully franking companies in a $1.6m pension account? Shorten has his numbers wrong and is basing them on the old unlimited pension account scheme – when people realise that the max likely for a $1.6m account fully invested in fully franked dividend paying companies is about $32k – a far cry from the $2.5m headline.
Exactly, they are using past SMSF figures pre the new Pension Cap. But hey it’s politics so the general rule of using some figures to create your own BS wanted story always is used.
Surprise surprise. ISA agrees with Labor union idea.
Surprise surprise, vested interests don’t!
To make it fair on everyone, the imputation system should be done away with all together. Like any other form of income, it should be distributed pretax and the recipient dealt with via a return to the ATO. That way everyone pays exactly what is due. No tax grab by Mr Shorten and his cronies. Pension funds will continue to pay no tax, individuals at their individual rate, super funds at 15% and annuity funds accordingly. There would be no argument that this would result in a fair outcome from the dividend distribution specifically. Why is it not done, it’s easier for the tax department to get the money from a few large organisations, than the population.
Runner, I’m on board with you other than the silly comment about this being a cash grab by Shorten. In what way, shape or form is ending a taxpayer funded giveaway a ‘tax grab’?
How is it a taxpayer funded giveaway? It is merely returning to the investors what the tax office took from them in the first place.
Because the company paid the tax and the ATO is cutting an equivalent cheque to a non-taxpayer.
How is taxpayer funded? The tax was paid by the corporate, Shorten is just not letting the individual entity claim it when they make a profit. Why not just declare us a socialist state and be done with it then. This sort of rubbish will further cause people not to try be self sufficient. Why bother when in 30 years some upstart comes along with a popularistic view and changes everything. Funny how he’s aware this doesn’t affect his previous employers, thus using it to try beat up their competition, the [b]self funded retiree [/b] aka SMSF’s. Remember, this affects the returns of all funds, and could result in more people claiming benefits. It will be great to chat to you then…
So you just don’t want company tax then? Taxpayers are given a credit so the earnings aren’t taxed twice. In the case of non-taxpayers you don’t even want the earnings taxed once. Why stop at dividend paying companies? Why shouldn’t non-taxpayers be gifted money for the tax paid by non-dividend paying companies? Why stop there? Let’s cut cheques to overseas shareholders – why should they pay – they presumably are subject to income tax in their own countries? Why not get rid of company tax altogether? I mean who needs schools and hospitals after all?
So I take it you have never claimed a deduction in your tax return and received money back from the tax office. Why stop with what Shorten has suggested, why not apply it to every individual, no refunds on any tax returns… Lets make go even further, why dont they just determine how much they all think we need to live on and take the rest…. This needs to be balanced, and with Shorten nothing is balanced. He just wants to get to the top of the pecking order, at whatever the cost.
They are claiming benefits right now???? How is a tax refund to a non-taxpayer not a benefit?
It would be interesting to know what numbers Labor have modelled this on. With unlimited tax-free being a thing of the past from 1st July, have they factored in the savings that this will generate? If funds are moving the surplus back into accumulation and getting the earnings taxed at 15%, this will reduce the cash refunds by close to half.
Depending on the details, won’t the Labour proposal affect every super pension with Australian share investments (even Industry Super pensions) by reducing or eliminating franking credit refunds? Comments welcomed.
Shouldn’t think so. The average super fund will have greater tax liabilities than the franking credits they’d receive I would have thought.
Unlike accumulation accounts superannuation pension accounts don’t pay tax on income. What would be their tax liabilities?
Sorry Geoff, I read your comment as every super fund. My mistake.
Should pension funds be choosing to invest in dividend paying companies because of this distortion? I get that it’s tough to give away free money but this was a stupid vote-grab on the part of the Howard/Costello Government. Wouldn’t it be better to find solutions rather than defend a concept that makes no sense?
Geoff, there’s a huge question-mark also on why people with huge superannuation balances should never pay any tax on that money.
Well that issue has been addressed and corrective measures introduced from 1st July.
There is a reason why the union funds are on board. There has already been mention of an exception for charities. What’s the bet Mr Shorten extends this to not for profit super funds? When the ALP are making the rules there is always a carve out for their mates.
Excellent point – ISA will push for a carve out.
You will note a number of ISA funds don’t yet offer pensions, and overall their members are majorly in accumulation stage, hence ISA wildly supporting this idea as a way of further causing issues with retail super who have the opposite numbers. Without doubt over the years as their member composition changes, they will utterly reverse their position and have their Labor puppet re-introduce imputation credit refunds, and herald it as a major financial win for the average Australian (refer to what Rudd/Gillard did with solar rebates).
Case of one foot out dribble and other foot in.
Surely the opposition would do some homework and understand that most low income taxpayers and pensioner would hold Telstra , CBA etc. The potential savings alone would make the village idiot release that it is boardspread across all levels of tax payers. ATO even has a short form tax return to claim franking credits for pensioners.
Mytops, so cap the amount receivable under this taxpayer funded cash giveaway. That will protect the lower income earners.
The proposal will result in additional tax being paid by low income (TI less than $37k) small business owners who operate their business via a company – if the company generates a profit and pays company tax at the applicable rate and pays a fully franked dividend to the owner in the same year, under the current rules the small business owner will receive a cash refund of the excess franking credits to compensate for the difference between the company tax rate and the owner’s marginal tax+medicare rate – under the new proposal, the small business owner will effectively pay a higher rate of personal tax, as the excess franking credits would be lost. People with carry forward income tax losses would also be unfairly penalised. If any changes are intended for the current franking rules, perhaps there should be a minimum franking credit threshold (similar to the holding period rule) to ensure that unintended consequences do not arise.
Vested interests talking their book gets a bit tiring. This was a Howard/Costello era pre-election cash giveaway. These stupidities need to be addressed at some stage. Lower income earners can be allowed for by capping the cash payment at a relatively low amount (per the SMH’s suggestion today) and/or via an increase in the pension.
Dividend imputation is about preventing the double taxation of earnings. People who are not paying income tax are not double taxed. Paying them a ‘refund’ means the Government is not collecting any tax at all. To take this idea to its logical conclusion, people should also be receiving cheques for the company tax paid by non-dividend paying businesses. How nuts would that be? It would be exactly as nuts as what is going on currently.
How on earth are you going to calculate an increase in the age pension for franking credits. Totally unworkable. Also the franking credit is taxable to the taxpayer. It is the tax free threshold that results in them paying no tax. The tax free threshold was increased significantly to reduce the tax for low income earners. Why not drop the tax free threshold back down to where it was before ? Why shouldn’t we all contribute something to the running of our country ?
John Edwards, sorry mate, you’ve read more into my comment than was there. I’ve read a million comments saying this is unfair to low income earners. So increase the pension, allow a continuance of this free money up to a cap etc.
What has cutting the tax free threshold got to do with this?
We should all contribute to the running of the country – that is exactly why cutting cheques to compensate people for tax they never paid is absurd.
So you are assuming that all low income earns are in the age pension? If a couple have $750K in super plus a car and home contents I will received no age pension and based on a 5% return they receive $37,500 pa and you want to take franking credits from them ? A couple with $200,000 gets the max age pension of $35,000 plus $10,000 from their funds and you want to give them more age pension and the self funded retiree nothing ??
I said no such thing John. I said there are ways to compensate lower income earners disadvantaged by this illogical handout.
Also Anon, this was also Labor policy at the time. Beasley was all for it.
Bill Shorten is trying to be Robin Hood/white knight but instead comes across as Jack dressed up as an Ass!
Nah, he’s doing what the current Government hasn’t got the political will to do – fix Howard/Costello era profligacy that is an ongoing and illogical drain on taxpayers.
Nah, this was also Labor policy at the time. Had Bomber Beasley won, we would still have had this same situation
For them to claim it only affects the wealthy SMSF snooty upper class pretty much demonstrates they have no idea how far it spreads down the line. Labor wants corporate taxes to stay high and retirees to pay corporate tax on dividends. Watch as our sharemarket cops a massive hit and funds and businesses head offshore.
They don’t make that claim Gerry.
They painted it as only 8% of fatcats in SMSFs getting 90% of the benefits. Will only effect a small number of people, they said. Then some better modelling comes out and shows that it will impact a much broader cross-section of the community. Typical SHorten fail.
On the basis of what we know of the Shorten plan, Michael’s comments are perfectly accurate. I am a self licensed adviser of 23 years standing and my client base is made up of mainly middle to lower class (economically) mum’s and dad’s. They will be significantly worse off under these proposed arrangements (again, as we know them) but my higher net worth clients will not. In terms of reducing the national debt, this proposal would help, but don’t sell it to the electorate by telling untruths.
Excuse me for being blunt, but do you really expect anything different to come from the Federal Opposition!?
Argue for a cap on the amount paid. Your lower income clients will not lose out. Your higher income clients will no longer get taxpayer funded rebates for tax they never paid.
Why do so many financial advisers see it as their role to defend overly generous handouts and concessions funded by other taxpayers? Am I the only adviser who doesn’t follow this practice?
Shorten and Whiteley are nothing more than slimy union officials who can’t be trusted, but this policy (which originates from Bowen) is actually quite sound.
probably because we’re strong users of such overly generous handouts & concessions. perhaps some cap on the level of refunds might be a interim measure so that the lower end is protected from this change, but with higher income earners not receiving large cash refunds.
Unlimited tax free super wasnt a thing before Costello changed it, the same with franking credit refunds. Some people have had it really good for 16-17 years, there’s no reason why changes to level out the playing field cant be introduced. There’s a $1.6M cap on tax-free super and something similar can also be done here. Say a max cash refund of $5,000.
This attitude is exactly what is wrong with public policy debate at the moment. Letting people keep their own money is not a handout. Giving a tax cut to anyone is not a handout. Anyone calling these things handouts (such as the Leader of the Opposition) is essentially saying that all funds belong to the Government, and that we will decide how much we let you have.
Giving a welfare benefit like the aged pension to people who have hundreds of thousands of dollars in liquid assets, and could easily access the equity in their million dollar homes, is a massive handout. It is totally inequitable and a gigantic drain on taxpayers. Yet most people seem to regard it as some sort of sacred entitlement.
What’s really wrong with public policy debate at the moment is that no-one is prepared to even question the Aged Pension handout.
Simple Simon, Howard/Costello decided to pay cheques to people who don’t pay income tax to compensate them for the income tax they never paid.
Rather than changing the franking credit refund arrangment in order to raise tax, why doesn’t Labour (and also the Liberals) tax resources at a reasonable level, like almost every other country, rather than the pitiful current arrangements that are squandering all our futures.
Good idea Phil, Labor tired to do that.
It’s not a franking credit refund.
The imputation system proposal by Labor is nonsensical – it is simply a wealth transfer from one group of Australians to the Government (albeit representative of all Australians). The fact is that a shareholder is entitled to their franking credits and should receive them – such a poor choice to make a policy position over – I would have thought Labor would be focused on bigger issues rather than undermining the very system that they (under Hawke/Keating) wisely introduced!
Mark, so you don’t believe companies should pay tax? If you do, why should the tax they pay be given away again so that the net to the federal budget is ZERO?