Frankly Speaking – What is the Labor Government Proposing?
Labor’s proposal to reclaim $60bn tax and ditch franking credit cash rebates last month has caused a stir amongst the financial community and the Australian public. The proposed shake-up initially directed at wealthy shareholders, retirees and self-managed super funds have been said to affect over 1 million Australians if it goes ahead next July. The ALP has campaigned against the changes with Treasurer Scott Morrison calling it “Labor’s cruel retiree tax”, in part by claiming that it will make the tax system more complicated, increase unequal treatment and is set to hurt some of Australia’s lowest income earners with small holdings of Australian shares.
What is Labor proposing in simple terms?
Labor plans are to target wealthy Australians with its latest tax policy proposal. They plan to stop people from receiving cash payments from the government for franked dividends which they say currently benefits the wealthy.
- On franked dividends, a business will pay the company tax of 30% (for big business) if they then transfer an amount to a shareholder or a ‘dividend’ to that shareholder it becomes a ‘franked dividend’. From that point, the shareholder can then take that off the tax they pay. However, if people have a lower tax rate than 30% Labor plans to abolish the cash refund you might receive from the government
- To affect 200,000 Self-managed super funds
- Set to affect 1.2 million Australians
- Charities and non-for-profit are exempt
- Those with one member a pensioner in a SMSF
If introduced July next year, it will be one of the first major changes to the dividend franking system, introduced by Paul Keating in the 1980’s.
So what are the effects of this proposal?
The biggest losers from this original proposal are in fact those who pay little to no tax, to begin with; pensioners and retirees. The SMSF association has warned that investors who have designed their portfolios around refundable franking credits will be affected and this may send them back to the drawing board to rethink their retirement income strategies.
For example, an SMSF with $500,000 in retirement phase with 40 percent of assets held in Australian shares could lose around $4,285 per year in tax refunds from their franking credits. This impact could be a significant hit to your annual retirement income.
The proposal can be viewed as a further blow to the growing ageing Australian population and pensioners who experienced changes in January 2017: 100,000 were cut off from the age pension and 300,000 are now seeing a reduced amount of age pension that they were previously entitled to.
Due to this, The Opposition Leader Bill Shorten has confirmed Labor will redesign the policy just two weeks after its initial release. Mr Shorten will announce a Pensioner Guarantee for pensioners and people on allowances, saying they will be protected from the loss of cash refunds for excess dividend imputation credits when the policy commences in July 2019 – should Labor be elected to government.
If the proposal does go through – mature funds may experience good years when investment earnings have been up, however, may lose franking credits during years with low or negative investment earnings where tax payable on accumulation phase earnings and contributions are less than the value of franking credits.
It could be seen as an opportunity for investors to diversify their shareholdings to stocks whose dividends are either partially or non-franked and international high yielding shares.
If you want to know more, call your MWL Financial Planner.