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Impact on returns from loss of excess franking

The Labor Party has announced that if elected, it will end cash refunds of imputation credits on dividends paid by Australian companies. It would reduce cash returns to Australian shareholders by about 25%, and it would reduce total returns (including capital gains and income) by about 1% per year. The change would have significant impact on taxpayers paying little or no tax, especially retirees in pension phase.

Cash returns from the overall Australian stock market are currently running at around 5.7% including 1.5% in franking credits. Without the franking credits, the cash income from a broad portfolio would be reduced to the unfranked 4.2% dividend yield, which is a drop of around 25% in the cash yield on the portfolio.

There would be no direct impact on foreign shareholders as they are not entitled to franking credits or cash refunds unless they have other Australian tax payable.


Dividend imputation was introduced by the Hawke/Keating Government from July 1987 starting from the 1987-1988 tax year. Before 1987 company profits in Australia were taxed twice – first as company tax on the profits in the hands of the company, and then if the company paid out its profits as dividends to Australian shareholders, it was taxed again in the hands of shareholders.

Dividend imputation (‘franking’) credits meant tax already paid as company tax were available to Australian shareholders to offset other tax payable on other income. Cash refunds of excess franking credits were introduced by the Howard/Costello Government from the 2000-2001 year.

Impact of franking on returns to Australian shareholders

The net impact on investment returns experienced by Australian shareholders in Australian listed companies has been significant. For taxpayers who had enough other income to use the franking credits fully from 1988, the franking credits have added an average of 1.7% per year to their total returns from the broad Australian stock market (S&P/ASX200 index).

Click to enlarge

The net benefit of franking credits has remained more or less constant over the period. The company tax rate has reduced from 39% to 30%, but the dividend payout rates across the market have risen from 60% to near 80%. On the chart I have added the total returns from the broad US market (S&P500 index) in hedged Australian dollars to remind investors that even including full re-investment of franking credits since 1988, the Australian market still lags the US market (in Australian dollar terms) by more than 3% per year.

If franking credit refunds are removed, it may lessen the myopic ‘home bias’ that many Australians suffer from and encourage them to increase their interest in other opportunities in global markets.


Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.


Doug Reid
April 02, 2018

Well Robin your comments could not be more accurate.

How is it that so many intelligent people is are ignorant of some simple truths?
Like many other self-funded retirees, we have lived frugally saving for our retirement.
We did not inherit large sums of money and have worked, saved and invested in Australian companies and a property. We took very few holidays. Like most other retirees we adhered to the system set out by Paul Keating's Government that was designed to assist retirees to self-fund their retirement rather than be reliant on the government pensions. We paid tax on shares and property in order to bring them into our super fund. We have kept up with the continual gnawing away at by respective governments at the rights we were supposed to be entitled. My wife and I do not receive a govt pension as pensions are means tested, we are excluded the multitude of free services and benefits that pensioners are Pensioners can receive hearing aids free of charge, I must pay $10,000 for the same product, which I am unable to afford. We are in no way “Rich “, we do not have a lavish life style. We pride ourselves as not being a burden on the government purse. We value our independence.
I view this proposed legislation by Bill Shorten as an attack on the persons who are NOT traditional Labor voters. The misinformation espoused by Bill Shorten with the intention of demonising the people who invest in Australian shares is scurrilous. Now we see the real policy that was designed to avoid offending pensioners who may hold shares. It is the theft of revenue from the middle class of Australians that Bill Shorten intends to use to fund their political promises. Franking credits are an essential part of the income we need to live on. Why bleed those who do not strain the public purse with a pension and pensioner benefits.
I would be interested in seeing the real cost to the Govt of an average pensioner, with the value of the additional health, registration and other associated benefits that pensioners are entitled to receive included?

March 23, 2018

Agree with your comments Brett. Would go one further and say the decision is quite possibly a trade off to the unions to get $ to flow from SMSF to industry funds. My $ may well do just that - I've had enough of being labelled for having the audacity to fund my own retirement. I've worked in the advice area for a number of years, and I couldn't begin to tell you how many people I have seen that have spent their working life drawing down on the house mortgage to buy expensive cars, boats, holidays and the like, and they get to retirement and then use their super to pay out the mortgage. And then guess what? They put their hand out for a pension. It doesn't pay to be financially responsible. I worked hard and had none of those things and I will lose 20% of my income if Short**** gets into power. I was a labor voter - won't be now until he's gone.

March 21, 2018

There is pretty likely to be an inequitable impact of this policy. Many concerned accumulation SMSFs will see less or no impact as concessional contributions create taxable income, so that should be factored in before figuring out how much will be lost. (the unintended consequence here is possibly a bias for concessional v non concessional personal contributions up to the cap). As SMSFs generally are concentrated by age and therefore ability to contribute, low contribution SMSFs are the most likely to lose (ie. in pension phase). Given the quick support that industry funds have given to this proposal (they have lots of concessional conts) it is pretty clear that the ALP are raising taxes from one of their most hated structures, SMSFs

Peter Worn
March 15, 2018

Excellent article thank you. Another wonderful example of the Law of Unintended Consequences. Labor Tax Policy encouraging Australian investors to move more money offshore.

March 15, 2018

Love your newsletter. A point though about Labor’s franking policy. Would it be fair to say that indirectly it would flow though to all investors in Pension mode to anyone holding Fully franked shares.? If so ,this would also lower the returns to those investors. It seems that the focus has been on the larger SMSFs.

Rod Lovel
March 15, 2018

Rod L,
Here we go again. I will be ok, just like the last big change. If this comes to pass, further shuffling of my SMSF. It will mean a drop of almost 30% to my income.

Things to consider;
Capital gain in pension phase is not taxed at all, do I trade more?
Accumulation phase income taxed at 15%, do I convert to accumulation phase and draw regular lump sums.

Bah Hum Drum, all a bit tedious, think you have it sorted. After all you cannot let the average mug be too settled.

March 15, 2018

Initially putting aside whether a "myopic" bias is a generalization (i.e. if individual investors focus on achieving the best after tax returns, which depends on individual circumstances, is this myopic?) it needs to be recognised that SMSF portfolios with high percentages of Australian shares in accumulation phase will also be adversely impacted, although not to the same extent as pension phase accounts, and retirees who have a small shareholding to provide limited income outside superannuation. This is a wide net.

With respect to fairness, logically in a progressive taxation system, I cannot see the equity in someone with a total taxable income of just less than $180k and franked share investment income of $20k receiving the full tax benefit of the franking credit ($8600 approx),while someone in retirement (with a nest egg of around $400k of shares) receives a tax benefit from franking of $2000 approx.

Alternatively is the writer promoting the concept that to remove "myopia" all credits be removed and double taxation be reintroduced in which case the fairness problem falls away?

Gary M
March 15, 2018

The newsletter this week with data from Credit Suisse shows about 20% of the ASX is owned by SMSFs, and about 25% by insto super funds. As marginal buyers focussed previously on franking credits, seems a change in their investing preferences could have an impact.

ashley owen
March 15, 2018

Hi Alex,

Most of the liquid local stock market (especially the dividend-paying end) is owned by foreign institutions that can't claim franking credits unless they have other tax payable here. So they are not directly affected.

Of the ASX-listed shares owned locally, most is owned by institutions (including retail/industry/corporate super funds, and non-super managed funds/ETFs) that can use franking credits against other local tax payable. Likewise the removal of franking credit refunds will not directly affect them either.

That leaves the relatively minor proportion of the market that is owned by zero and low tax bracket investors (SMSFs and small direct shareholders). Anecdotally these holdings are concentrated in a 'bar-bell' strategy - (a) high dividend paying top 10 stocks (big banks and the big demutualisations like Telstra), and (b) speculative small/micro caps and other faddish hot stocks (very few pay dividends).

My early guess is that there will be little or no appreciable price impact of any change in return expectations from the overall market.

However there are some specific sectors that will be directly affected - the most obvious is the listed hybrid market - which relies on franking credits as their raison d'etre. Banks will probably have to replace the current hybrid issues with new sub-debt or sub-sub debt with tax-deductible coupons. If so the current batch of hybrids will probably fall in price back to par - which would mean capital losses from current levels.
Time will tell - and there is a lot of political horse trading before anything gets into law.

Warren Bird
March 15, 2018

Charities, which seem to have rated very little mention in the discussion so far, will also be adversely affected. Those that have bequest funds, etc, invested in shares will lose under the proposal.

Graham Hand
March 15, 2018

And it's also been said that the Future Fund will lose $1 billion in franking credits (I haven't verified this).

Graham Hand
March 15, 2018

Labor said charities and not-for-profit institutions, including universities, would be excluded from the change.

Frank Gomez
March 15, 2018

The proposal by Labor is not to abolish dividend imputation but only to restrict the excess credits for those taxpayers or entities who are on a marginal tax rate of less than the company tax rate.

This will largely affect super funds that pay 15% on earnings or pension funds which pay 0% on earnings as well as individual retirees on low incomes who pay no or little tax and hold some direct shares that pay franked dividends.

Anyone on a marginal tax rate of 30% or more that owns shares will not be affected because they will still get the full benefit from the credit.

March 15, 2018

If more than half the ASX market is held by Australians and they reduce their expected return accordingly, should there be an equivalent drop in market value?

Paul Kibble
March 15, 2018

Lets not get too far ahead of themselves.
I know the Gov is pretty impotent, but Bill is not PM just yet.


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