Franking Credits… Again

Hey team,

Let’s go back to franking credits which we discussed a couple of weeks ago as there’s been some more developments. First though, we should be really clear what franking credits are, who benefits from them and what the Labor government is proposing to do.

What are Franking Credits?
They are essentially tax credits attached to dividends investors receive from shares they own. They exist because when companies pay out dividends, they normally do so from their after-tax profits. After tax being the key. As companies have already paid tax on the dividends, it doesn’t make sense that investors should then have to pay tax on them again when it comes time to do their tax returns. So, the government lets you get a credit (aka a franking credit), for taxes already paid. It’s done to stop double taxation. Fair enough right?

Who Benefits?
Anyone who owns shares. It’s true. Particularly poor old pensioners Martha and Toby who have 5,000 dollars in ANZ shares and were using the franking credit rebates to buy a coffee at the corner store once a fortnight. Their one luxury in life after nearly 50 years spent working menial jobs just to get by.

What’s Labor trying to do?
They want to get rid of the franking credit rebates from investors who aren’t paying any tax. Say you’re not working, therefore have no income and have a marginal tax rate of 0%. If you owned shares which had franking credits attached under this scenario, you would actually receive a cash payment from the government come tax time. The problem with this is whereas the intention of franking credits was to remove double taxation, in this case, the dividends, and the profits made by the company to generate them will actually have no taxation associated with them at all.

Somewhat perverse no?

So, Labor is proposing to remove these cash rebates from people who do not pay tax. That’s it. But, they’ll exempt pensioners like Martha and Toby and rightfully so. Doing this will allow the government to recoup nearly 60 billion dollars over the next 10 years which would otherwise have been paid out as cash payments to wealthy retirees.

Wealthy Retirees?
Yes. Wealthy retirees. Once you’re retired, your first 1.6 million dollars invested in your superannuation remains tax-free. It means any income or earnings you make on this amount pays zero tax. And that’s fair enough too. You’ve worked hard, you’ve saved hard, you’re no longer drawing a salary and if you’re not taking a pension and costing the government or tax payers anything. Why should you get taxed on it. This money is supposed to last you until you die.

The thing is, many of these wealthy retirees have been loading up their superannuation with high dividend paying Australian shares to take advantage of these franking credit rebates and cash payments. In the extreme case, you could have a couple with 3.2 million in total superannuation savings, living in a house they have fully paid off, receiving very sizable tax refunds every year from these franking credits.

And it is these investors and only these investors that the Labor government is trying to target with their plan. Not pensioners.

Anyway, that’s 5 minutes. Hope it helped. 

Categories: Tax

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