Time to talk frankly about franking credits

I am not commenting on whether the policy of not refunding unused franking credits is correct or not but Mr Chow's argument simply misrepresents the situation and is wrong! $70 with a $30 franking credit means $100 of income on which the shareholder pays the required tax. If the shareholder's tax rate is nil they should receive $100. If unused franking credits are not refunded then they will receive less than $100 and are clearly paying tax when they are not required to. Do we want to double tax or not - that is the issue. Please lets have a considered and logical look at this issue and leave "the rich" out of the discussion.

Chris makes a very compelling case, except for one thing. Why should ANY taxpayer have to "wear" a tax payment that is in excess of their marginal tax rate? If a person earns bank interest, but not to the extent that they trigger income tax, they pay zero. Why should they have to accept a 30% tax rate simply because they choose to invest in shares paying franked dividends, rather than putting their money into a bank account?

Hi David,

Thanks for your comment. I absolutely understand your side of the argument and I don't think that's been misrepresented, and I am aware the $30 acts as 'tax' being paid by the individual.

However, my main issue is that it was not a great policy to make these credits refundable in the first place from the perspective of Australia's budget. Of course, it provided a tax benefit to a small portion of low-income earners, but it has provided a significantly greater benefit for many more self-funded retirees than it has to low income earners.

One has to question why we are one of the few countries that continue to operate a fully refundable dividend imputation system, which only became fully refundable in 2001, while many countries have removed or partially removed their systems since then.

While I do understand your argument, I am respectfully taking the opposing view and believe that it is a small price to pay for something that should not have existed in the first place.

Wayne states that the cancellation of the refund is aimed "primarily at the expense of people who can most afford it". His analysis then explains that the only people who get a refund are those with a marginal tax rate of 30% or less. This can only be those with low income or self funded retirees who have saved for their retirment in the expectation that they would enjoy the promised "tax exempt pension income". Now that this promise has been pruned by the transfer balance cap there is simply no truth to the claim that this policy is aimed at the rich. Wake up Wayne this is primary school mathematics?

Hi Wayne,

I also thank you for your comment and do also understand your argument. I do point to the taxation of investment bonds as an investment where people accept a 30% tax rate. Hence, lower income earners generally avoid this investment.

I also understand the tax structures are different, but at the end of the day, I am not saying those that pay no tax should 'accept a 30% tax rate'. People will adapt accordingly to any new changes in tax law, so their investment decisions will also change as a result.

As per my comments to David, I am respectfully taking the opposing view and believe that franking credits should not be refundable as it significantly reduces budget revenues and overall has a significantly greater benefit to those that do not necessarily need a helping hand.

If that is your view, which I respect, would it not be better to argue for a change in the taxation of SMSFs. What is proposed is that it is OK to have a tax system that abhors double taxation for everyone other than nil tax payers. In effect nil tax payers are fair game to be double taxed. Would it not be better to advocate for a system that taxes logically and sensibly and where citizens can understand who is paying and why. In other words an open and transparent system that doesn't simply do things that are politically popular but explained in a socially divisive way.

Politicians and the media must try to achieve honest debate even if this is nirvana!

The Australian super system is an excellent one that encourages people to save their own money over 40 years or so in order to fund their own retirement and, in the course of that, stay off the tax payer funded Age Pension.

To encourage them to lock their money away and not have access to it for up to 40 years they need some tax incentives and they need to remain untouched. Continual change will only undermine confidence in the system and encourage people to look for alternatives to super.

It is also easy and convenient to forget that paying excess franking credits in cash was brought in by the Howard Government to compensate all pensioners for the introduction of the GST which was also accompanied by a reduction in personal taxes which pensioners could not access. It was in 2001 when there was no mining boom or a booming economy.

This change will hit all people in pension mode by reducing their annual income by 25%. It is a savage hit on those who can least afford it. A couple who have saved their own money and have $900K in super, which excludes them from going on to the Age Pension, will have their income drop from $39K to $29K pa. Their income will be less than the Age Pension they could access if they had spent all their super.

Clearly, this policy proposal by Labor will encourage people to spend their super and go on to the Age Pension. The reverse of what they are trying to achieve. Chris should do his sums. A couple on the Age Pension for up to 25 years will cost future tax payers a lot more than the tax concessions given to pensioners ($875,000 in todays money). Chris and his kids and grandkids should be aware of this. The wealthy have been restricted by a limit of $1.6 million that can go in to super. From this they would earn max. $75K in income which is less than the average wage. It is not a fortune.

David - thanks for your comment again. I think a policy that precludes super funds from receiving franking credit refunds would be a very good idea. This is something that could certainly be considered, although I think this hasn't been suggested as both parties are wary of making further changes that target superannuation funds only. I agree that an open discussion is needed. However, I think the backlash from most corners regarding this policy has also been very heavy-handed, hence the reason for me trying to balance this discussion a little bit.