What Are the Proposed Changes to Franking Credits?

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In March 2018, Labor Leader Bill Shorten announced that if Labor were to win the next federal election, they would plan to stop taxpayers from receiving a cash refund for excess dividend imputation credits; with changes to come into effect from 01 July 2019.

What are franking credits?

For those that are unfamiliar with how franking credits work and the imputation system in general, simply put, franking credits are company taxes that have been attributed to shareholders. 

These are attached to most Australian dividend payments.  

What is the dividend imputation system?

The imputation system ensures that company profits are not being taxed twice: first at a company level when tax is paid on a company’s net profit, and again when a taxpayer declares dividend income in their annual income tax return.  

The franking credit reduces the total income tax payable by the taxpayer, and in some cases, can result in an income tax refund (when the franking credit is more than the income tax owed by the taxpayer).

What are the changes?

Under Labor’s proposal, where a refund of franking credits results in a refund for the taxpayer the cash refund is ignored. 

It will instead be a non-refundable tax offset.  Labor suggest that their changes will only affect 1.2 million shareholders and 200,000 Self-Managed Superannuation Funds (SMSFs).

What’s an example of this being used?

Terry has 2000 shares in a listed company worth around $200,000. Along with the pension, this is Terry’s only source of income.  

The income accrued from the pension added to the dividend income from his listed shares creates his annual earnings – which are tax-free.

If we assume the company will pay $5.00 in fully franked dividends this financial year, the total value of dividend plus franking equates to $7.14, of which $5.00 is paid throughout the year, and the $2.14 is recouped as a refund at tax time.

Under the Labor proposal, Terry is worse off by $2.14 per share, or $4,280 per annum.

What will happen if these changes occur?

If these changes were to come into effect from 01 July 2019, individuals, businesses and superannuation funds may wish to consider the impact on their existing business arrangements. 

Aspects to consider might include the cash flow impact of no longer receiving franking credits or the timing of future dividends from business profits.

Disclaimer – this article is unbiased and based facts available to the public. UHY Haines Norton has no intention to influence political views in any way and the opinion on this matter remains with the reader.  

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