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Back to basics shows franking credit refunds are fair

Federal Opposition Leader Bill Shorten has proposed to change the dividend imputation system so that people or funds who have a zero tax rate do not receive franking credits. He has presented it as making the tax system fairer, by clawing back what is asserted to be an overly-generous provision. However, if implemented, it would make the tax system much less fair.

What is dividend imputation supposed to do?

Let's start by going back to the fundamental principle behind dividend imputation, which is to ensure that income is taxed once by those who are obliged to pay it.

If people who have a zero tax obligation do not received franking credit refunds, then they have paid tax on income when they should not have. This results in them paying more tax than someone who earns the same gross income.

To illustrate, consider the following three cases.

  • Person A does a little bit of part-time work that earns $17,500 a year, just under the income tax threshold. They don't pay tax.
  • Person B is semi-retired, but runs a small sole trader business that brings in a net of $17,500 a year. They also don't have a tax obligation.
  • Person C is retired and owns shares in a company that earns $17,500 of profit on C's shares. Being a company with other shareholders, it pays 30% company tax and most of the rest is distributed to shareholders as dividends. Person C receives a dividend of $12,250 (that is, 70% of $17,500). They have effectively paid $5,250 in tax on their income because of the veil that the company structure has created.

Under the current imputation system, Person C receives a franking credit for that amount and a payment of $5,250 comes from the ATO. This recognises the fact that the full $17,500 earned by the company should belong to Person C, just the same as Person B’s business income or Person A’s part-time salary.

It’s similar to someone getting a tax refund at the end of the year because their PAYG taxes didn’t take legitimate deductions into account. They overpaid tax and so are allowed to get it back. It is their money.

Why the current system is fair

The proposal by the Labor Party will take this away, leaving Person C with a lower income. That is not fair. Why should the presence of other income earners on the share register of the company force low income earner Person C to pay 30% tax?

There was a lengthy discussion of this in the Campbell Inquiry in 1981 (see chapter 14). When he introduced dividend imputation in 1987, Paul Keating moved our tax system in the right direction. However, his system had a flaw in it because Person C in my example was not afforded the same fairness as higher tax rate payers. John Howard (the Treasurer to whom the Campbell Inquiry Report was delivered) and Peter Costello fixed it, so that Person C could get that $5,250 back. Thus, in two steps we ended up with a much better tax system.

I understand charities will be exempt from this change. That seems to recognise the very point I am making. Why stop there? All people who have a zero tax rate should be treated the same and people who have a zero tax obligation shouldn't be forced to pay tax. This is a matter of not discriminating against those who happen to earn their income through shareholdings.

Most of the arguments against zero tax rate individuals receiving franking credits are actually arguments against the whole dividend imputation system. For if you accept that zero tax payers shouldn’t get a credit, why stop there? Why should any tax payer get franking credits to offset other tax? The answer for all is that the pre-tax earnings of the companies they own, partly via being one shareholder among many, or wholly if it is their own business, belong to them.

The company, for all shareholders irrespective of their tax rate, is simply a pooling structure. It should not pay tax on earnings it pays to the members of the pool. The fact that it does is what creates the errors of perception about the incidence of taxation, about who should pay what, that are now clouding the discussion.

The current dividend imputation system is the second-best way of fixing the error that having a company tax system has created. The best way would be to have a zero company tax rate and apply withholding tax on retained earnings and foreign shareholder distributions.

From the Budget point of view, both systems would raise the same revenue.

The real issue is the zero rate paid by some taxpayers

Which brings us to the real issue behind Mr Shorten’s proposal. It reflects a view that some taxpayers shouldn’t be in the zero tax bracket, with SMSFs in pension phase a particular target. In that case, he should just propose a change to their tax rate. Be explicit about who is taxed and why. Don’t hide behind erroneous thinking and bad policy, and don’t muck up a good tax reform.

Understanding imputation in this way also changes the discussion about the company tax rate. The economic and public finance impact is the same as if the company tax rate was already zero. Domestic shareholders pay tax on the earnings that they receive from dividends at their own tax rate. All the tax paid by companies on behalf of local shareholders is effectively repaid via the franking credit system and the individual (or managed fund or SMSF or charity) is assessed for tax on the income. Foreign shareholders pay a rate of 30%, and there's a 30% tax on retained earnings.

If the company tax rate was zero and the government charged 30% withholding tax on all dividend payments to non-residents and on retained earnings, the budget would be in exactly the same position as it is now. There’d be no need for an imputation system. There’d be no franking credits for any income level and shareholders would include dividends (on which no tax had already been paid) in their income tax calculation.

The company is simply prepaying tax for its shareholders

Politically, the latter is unlikely to come in. My point is that the discussion about tax policy matters required us to recognise that the individual is always the ultimate payer of any tax and is where the incidence of tax lies. Behind the ‘veil’ of the legal structure, when a company pays tax it is, in effect, prepaying tax for its shareholders.

The point of the imputation system is to adjust how much tax has been collected on the shareholder’s behalf and correct it back to the amount of tax that should have paid in the first place. If that was zero, then a fair and just system would pay a tax refund. We have that system now. It shouldn’t change.


Warren Bird is Executive Director of Uniting Financial Services, a division of the Uniting Church (NSW & ACT). He has 30 years’ experience in fixed income investing. He also serves as an Independent Member of the GESB Investment Committee.

Warren would like to thank John Stroud, who worked on the Campbell Inquiry, for reminding him of the fundamental principle on which this article is based.

Warren Bird
October 29, 2018

NO!!! It's appropriate for the recipient to pay tax on interest on corporate bonds or bank accounts. No tax has been paid on that, and in fact it's been a deduction from gross income by the issuing company.
It's totally appropriate for recipients of dividends to get a franking credit to offset against other taxable income and a credit if they have no other taxable income.

This is a tax policy issue. Since when does the government have any say about what asset allocation an individual can choose to have in a free world?

As for the idea that more people should increase the risk of their portfolios by taking concentrated risk in domestic corporate credit, I've written about that elsewhere. Forcing, or encouraging, the substitution of lower, assymetrical return assets for higher risk, but higher return assets would be madness.

Warren Bird
September 26, 2018

Way to go, Geoff!

April 14, 2018

One of the issues that seems to me to be overlooked in all this mess (possibly due to the ALP refusal to release the costing assumptions, etc.) is the premise that the so called budget “savings” will likely fall well short of the much touted $5.9b pa.

For instance, the changes made by the Libs last year with the introduction of the TBC will have already had the effect of removing “excessive” franking credit refunds commencing this FY, especially those quoted by Shorten and Bowen in their original announcement. The fact they quoted such pre TBC numbers suggests their supposed savings are fictional from the outset, and the assumptions therefore likely based on essentially useless pre FY18 numbers.

In addition, as we all know, tax incentives (or disincentives) distort investor behaviour in this country and already we are hearing myriad ways to circumvent some of the likely impact for many investors/structures. This adds further to the argument that Labors’ tax savings are in fact illusory.

Surely Labor must already know all of this? Why then proceed with it?

Unfortunately one is left with no other conclusion than the whole exercise is simply a cynical mechanism for the ALP to further diminish the whole concept of the SMSF, to the obvious end benefit of the Industry Funds.

April 15, 2018

Agree Rob. Unless the reason why the ALP are quoting pre-TBC numbers is that it is their intention to repeal the Coalition's 1 July 2017 legislation. The "grandfathering" principle, so long a sacred cow in our tax legislative framework, seems to be more expendable these days. So whose to say that the ALP, if they win government, won't continue its demise.

March 30, 2018

I am so glad I found this website as I am absolutely fuming that this is even being considered.
I had a 37 year career in all aspects of the finance industry including the money market.
I have been through all aspects of personal taxation i.e. provisional tax, nonrefundable imputation credits and now refundable imputation credits.
I made a decision early in my career that I would never rely on the Australian government to fund my retirement.
In my opinion,the following facts should be considered:-
1. I spent my money to buy those shares in 1984.
2. The whole idea of all of the above tax systems is to give the ATO early use of those funds.
3. Once the imputation credit is added to MY "taxable income" then it is MY money.
4. This "taxable income" figure is then used to calculate MY "tax payable".
5. This "taxable income" figure is also used to calculate MY medicare levy.
6. How Mr. Shorten can possibly say that this money does not belong to me is beyond belief!! Does he want me to add to the number of pensioners to be supported by the Govt.?
7. In my opinion, to not refund any excess to me means that the ATO is unfairly retaining the tax payments already paid to them well before the end of the taxation year.
I rest my case.

April 14, 2018

"This “taxable income” figure is also used to calculate MY medicare levy."

It will be interesting to see how they can legally apply medicare levy to part of your "income" (the non-refundable franking credit) from which you receive absolutely no financial benefit, either before or after tax, whatsoever.

March 29, 2018


An individual on $60k pays 32.5% tax, and add medicare and NDIS levy you are close to 40% against the untaxed senior on 0%. If you wish to bring in other earning members of the family, we should also factor in the costs of bringing up kids, while the senior's kids would have flown the nest.

The point remains: current consumption demands those who produce goods and services now should not be penalised relative to those who have stored the fruits of past exertion. It is okay to disagree on principle but the factual disequilibrium must be lived with.

March 27, 2018

Well done Warren!

Yes I fundamentally agree with the need to protect the zero rated taxpayers but only in the context of a progressive tax system. I applaud you for using an example that compares three different zero-rated taxpayers (including the self-funded retiree) all of whom operate under the progressive tax system. After all, the dividend imputation system was introduced at a time when all individuals were subject to a progressive tax system and did not envisage a circumstance where dividend recipients (other than tax exempt charities) would enjoy tax exempt status in relation to their income. In this context, it would seem appropriate when measuring the impact of the ALP proposal (in terms of equity and fairness) to put the focus on the those individuals who derive their franked dividend income under the progressive tax system.

P.S. Even SMSF members who wish to live a long life have to face the reality that at some point in future the minimum pension rules will force them to sell down shares in their SMSF and build up equity in the personal name thereby bringing them back into the progressive tax system.

March 27, 2018

This thread also clearly shows how individuals try to reinforce their own class bias by selecting avoiding the actual facts

Ramani - no one in the country on $60K pays 40% MTR. In fact please identify anyone with a family that pays any net tax after benefits? The top 20% of earning pay +80% of all tax which is amongst the highest progressive tax structure in the world. We devote more to social security benefit payments that communist countries

Gen Y - aren't you ignoring the bleeding obvious about taxing company retained earnings - what incentive would they have to reinvest and grow? Gee wiz

Gen Y
March 28, 2018

Denial, I am not sure I understand your point. Currently there is little incentive for companies to reinvest and grow, as a huge chunk of investors demand high dividend payouts as the proportion of profit paid as a dividend is more favourably treated for tax purposes in their own hands. This is why we have some of the largest dividend payout ratios in the world, and some could argue why we've fallen behind the rest of the world when it comes to innovation.

At least if retained profits were treated the same way as paid out profits, this would remove the bias to paying out dividends rather than retaining earnings

March 26, 2018

It will be interesting to see the changes the ALP announces to its franking credit policy this week. Mr Shorten seems to assume that retirees who currently receive a refund of excess franking credits will continue to hold investments in companies that pay fully franked dividends. Or that some companies will not restructure their finances in order to reduce the proportion of franking they pay. So the actual “loss” to revenue may end up being less than 20% of the headline grabbing number. But the ALP will assume they can spend the lot.

That said, I admire the willingness of the ALP to take this policy to an election. Unlike the Liberal Party who promised no changes to superannuation and then made retrospective changes to the scheme. For example, superannuates on taxable Defined Benefit Pensions having the notional value of their fund being included in the tax-free pension cap.

The bottom line is that regular policy changes that reduce the benefits of superannuation, the rhetoric of some politicians that it is immoral to be a wealthy retiree and the ongoing arguments between industry, retail and SMSFs will discourage people from aspiring to being self-funded in their retirement.

March 26, 2018

Excellent article. Someone should show it to Bill Shorten. However he probably wouldn't read it as he just has a Class Warfare attitude to his life, the rest of us and politics in general.
Or maybe if he did read it, he probably wouldn't be able to understand it.

Warren Bird
March 26, 2018

Here's another admission by the ALP that it's not about dividend imputation as such, but about who should be taxed: I call on them to scrap this bad policy and make a much cleaner, overt decision about changing the tax rates of individual tax payers if that's what they want to do. Be honest, be transparent and give the public the chance to debate the real issue, not confuse things the way this measure has done.

April 14, 2018

It's a bizarre policy that an Age pensioner getting $1 a fortnight will retain his franking credit refunds but go over the income or assets test limit and suddenly all those franking credit refunds are gone. $7,528 per year worse off for someone earning $37,000 franked dividend taxable income. That must be one of the records for effective marginal tax rate.

Ross Bell
March 23, 2018

Simple, leave imputation in tack, and abolish the tax holiday on all super income, fair!

March 24, 2018

Hardly fair to tax super on the way in (contributions), the earnings in accumulation and then tax pension income too! Who would bother having it, beyond employer compulsory contributions?
Government needs to agree on a long term, bipartisan policy for superannuation before what little confidence in the system is totally, irrevocably destroyed!
Otherwise, scrap it and go the universal pension option like New Zealand!

April 14, 2018

It doesn't matter how many times you tax super it's the total amount that matters. The pension used to be taxed with a 15% rebate for contributions tax.

March 23, 2018

It may be a bit off topic but I recoil over the pushing by shorten that some people have a PENSION (income) of over $100,000 and yet can get a refund of franking credits on shares they hold outside super.

If we consider the SMSF balance to be capital (like a home) and we compulsory draw down part each year (or sell a room each year of our home) then we are lowering our net worth and reducing our capital. It is not and should be income. The earnings have been taxed, at a low rate, during the accumulation phase and the concessional contributions have been taxed when contributed. We have been encouraged to do this with the reward that the pension would not be taxable in any way when we retired and hopefully it would lead to a comfortable retirement without the reliance on the Government for an aged pension. WIN WIN.

March 23, 2018

Thanks Warren. I've now had the opportunity to look at Chapter 14 of the Campbell Inquiry. It seems the basis of the position they recommended in that report was "full integration of the company and personal income tax systems." Effectively, piercing the corporate veil to look-through to the ultimate beneficiary of the income.

However, the government of the day did not accept this position and hence we are left with the imputation system introduced by Paul Keating. Clearly Keating's intention was that corporate tax not be seen as a pre-payment of personal tax, but rather as a means of ensuring profits were taxed at one point along the taxation spectrum, but not twice. This may have been the "popular" or "layman's" view, but it is also the reality of the system as it was introduced. It was Howard's changes that introduced this concept of "look-through" taxation, moving the system closer to a fully integrated system.

I guess my question would be: Is it equitable that there should be profits generated by a company upon which no tax has been or is payable? In today's world, can we afford such generosity?

March 23, 2018

On Matt's question I am not persuaded by a reflection on generosity but more persuaded that in a pure imputation scenario the company profit should be taxed at the shareholder rate even if that is zero. By turning the exempt-exempt-tax flow of superannuation to tax-tax-exempt, Keating managed to get his hands on super earlier than he would have by about 30 years. If he had stuck with having super output stage income added to personal incomes then we would be in a different world now.

April 14, 2018

Is it equitable that there should be taxable income upon which no tax is payable? If the answer is yes then what does the word equitable mean between different sources of taxable income? If your answer (to the first question) is no then you're welcome to the view that there should be no tax-free threshold.

March 23, 2018

Is it correct to say that the fundamental principle behind dividend imputation is to ensure that income is taxed once by those who are obliged to pay it? My understanding is that the fundamental principle was to prevent income from being taxed twice (double taxation).

The difference is subtle but critical to the premise behind Warren’s article.

It’s difficult to believe that the intent of the parliament when introducing the imputation system was that income should not be taxed at all. It’s more likely that they intended that it be subject to a maximum rate, over and above which a refund would be provided. That rate for better or worse is the corporate tax rate; the source of the earnings.

Warren Bird
March 23, 2018

Matt, the idea of avoiding 'double taxation' was how it was popularly presented, but if you read the Campbell Inquiry chapter 14 you'll see that the concept was as I've presented it. See especially table 14.1 and accompanying text which quite clearly includes the idea that those whose income is below the tax free threshold are effectively having tax taken out of their income and that this ought not be the case.

Chris O'Neill
September 17, 2018

The fundamental principle behind imputation is that shareholders are imputed to pay their company's tax. That's what the word "impute" means.

March 23, 2018

Suppose Labour's dividend policy is implemented, there is another scenario that seems a simple way around it. It seems too simple so I would appreciate if someone could tell me where I am wrong!

What if companies just stopped providing franked dividends?

So instead of a company making $100 profit, paying $30 tax, and distributing a $70 dividend, that to:

1) Retiree with shares is now unable to claim the $30 cash refund from tax office, but,
2) Worker in 45% tax bracket still claims the credits and pays an extra $15 - $55 in pocket.

The company now makes $100 profit, and distributes $100 to the shareholder.

1) Retiree receives $100, and then pays no tax because he is under the threshold
2) Worker receives $100, pays his marginal rate of 45%, and ends up with the same $55 in pocket.

Provided the profit distributed back to shareholders is proportionally more, then the people affected by this policy change will end up with the same place, and those not affected will not be any different either.

There must be something I am missing.

March 23, 2018

Thanks Warren, I was supportive of Labor's proposed change and your argument has shown me that action is required but not in the manner proposed.

March 23, 2018

Two questions for comment:
1. For those who would lose their franking credits, it would seem that the imputed credits lost would be included in taxable income on which they would pay the Medicare levy and be counted towards the Seniors healthcare etc.
2. Further to Question 1, does it mean that the tax offsets (low income and SAPTO) are effectively lost?

March 23, 2018

There was no detail if the credit can count against any applicable medicare levy. If this ever gets up we would see the detail then. The main gains are from those with zero taxable income so would not be paying the medicare levy anyway
The Offsets only reduce tax payable to zero so there would be no change. there is not SAPTO refund if taxable income is low

March 29, 2018

If the rebate does not cover the Medicare levy (the non-refundable ones generally don't) then we are left in an interesting situation.

You would presumably still be required to add the unusable portion of the franking credit to your income before the Medicare levy was calculated. You would therefore be paying the levy on income that you never received and never can receive.

I have a fix for this. The forty five day rule. If you know you will have excess franking credit and will be required to pay Medicare levy on it, then sell and rebuy some of the shares before the ex dividend date and again afterwards, so you hold them for less than the 45 days around the ex-div date You then only need to add the dividend amount to your taxable income, not the franking for those dividends. It would require some calculating for how much credit you can use and how much would be excess, but you could save a few hundred dollars of Medicare levy. I have to say I hate the forty five day rule and I never thought I would ever see the day when it could actually be useful.

The backflip of a few days ago where pensioners are now being excluded makes it even more complex. If you qualify for a dollar of pension you get back all your franking. If you have assets even slightly over the threshold you lose any excess. Quite an incentive to spend out on a holiday or house renovations. Shares in cruise companies could benefit here.

Then we have the rather startling announcement yesterday that it will not apply to SMSF's where one member is on any sort of Centrelink benefit at 28 March 2018.

Yesterday I firmly resisted the temptation to add a relative on disability support as a new member of our SMSF to get in before the deadline and qualify for the exemption.

I am waiting with bated breath for what new twist they come up with next.

And I am starting to feel sorry for whoever gets the job of drafting up the legislation for all this.

Graham Hand
March 29, 2018

Hi Laine, yes I was also tempted to do the same (as follows) to beat the deadline but let it go. "Yesterday I firmly resisted the temptation to add a relative on disability support as a new member of our SMSF to get in before the deadline and qualify for the exemption."

April 14, 2018

At the moment there is no requirement for declaring your tax file number to your company paying fully franked dividends and it has no requirement to deduct tax installments from your fully franked dividends.

You could then just not declare your tax file number and dividends and the tax office would not know about your dividends or franking credits.

You would then not be paying medicare levy on your dividends or franking credits no matter how much you receive.

Chris Jankowski
March 23, 2018

If the Labour Party proposed change is introduced then there will be many unforeseen and probably from the Labour point of view unintended consequences in the way the companies structure themselves, the investment markets and investment vehicles.

Generally, retaining the earnings, be that for expansion or share buybacks will be name of the game for companies. Dividends will be shunned.

It will be more attractive for many investors to invest overseas instead of in Australia.

LICs investing in Australian shares will go out of fashion.

March 23, 2018

I should add that my income is more than the $100k mentioned,thus as the end user my income is still taxed as if I was working.

Should the policy come in then as Warren explained the difference comes in, the $5K is not refunded.

March 22, 2018

Super needs to be taxed and divi imputation is still not understood,try it this way.

My bias is I do not like super at all.

Tax on $100K derived from work is 25% in round numbers.Take home 75K.

For me passive income grossed up $100K,franking credits of $30K,take home $70K End of year rebate $5K.

Superfund gross income $100K ,including $30 K of franking credits.Credits refunded,take home $100K.

Because I believe in paying tax I kept everything outside of super.The policy does not change my life at all.As the end user my income is taxed at full rates .No pension,no cards ,no nothing ( except my bus pass from the state govt )

Unless I have fallen for the biggest con trick ever then we all need to pay more tax or suffer worse social services.

I would like a bit of recognition for saving the govt $35 K a year in pension costs,it is never going to happen.

I would advise everybody to do the same.Aim for a high income ,aim to pay a good amount of tax,stop complaining because they think the other man's grass is greener.Stop complaining because they think that prior generations had it easier,they didn't

Just my 2 cents worth.

David J
March 22, 2018

Hi Warren
The focus is on SMSF's. Can you please confirm how this would work in a retail account based pension like BT Wrap. Is it the same ie the person would not receive any franking credit refund as they currently do or do retail funds have different taxing rules like Industry Funds

March 22, 2018

Thanks Warren for your concise article and I believe the quite broad range of ongoing comments after the article of the week before show how volatile the subject is. A point that has not been generally raised as far as I can see has around the overall fairness of what I see as two somewhat separate systems. We are all subject to personal tax outcomes via our annual returns. These do not include Superannuation. For me, superannuation is managed separately and the zero tax question then should be asked in the light of providing compensation for citizens who are forced to forego income over working lives. The Govt takes 15% off the top on entry, taxes one at 15% on the way and the citizen takes the investment risk over many year whilst attempting to build up a nest egg.

What Ramani and others seem to discount is this lifetime risk and the zero tax question comes from the idea that at what point should the citizen get his reward for risk taken.

My discussion here is nothing to do with imputation which to me, is well covered by Warren and I agree that the system as is, is fair to all who participate. In a once tax paying system the ATO acts as a flow through agency and tax is paid at the share owner level-as it should be.

And yes, I am an interested recipient of imp credits in my smsf so I get upset if my adult children in the smsf and their parents in pension phase are targeted whilst others are not.

Warren Bird
March 23, 2018

Thanks Randall, your comment highlights what for me has been the unfortunate mixing of two separate policy questions by this proposal.

March 22, 2018

Many people, including myself will have paid a not inconsiderable amount if income tax by the time they are eligible to retire. I wish that I actually had a figure.
Many, like me hope to never draw a government pension and will probably never even qualify for a pharmaceutical benefits card.
I’ve been fortunate enough to have been able to afford private health insurance for all my family, which I will keep paying for, and to be able to educate my children privately. Never received any family tax benefits and I’m ok with that.
Yes I’ve used roads etc but we all continue to pay for those with a myriad of taxes, fuel exises, gst and even outdated stamp duties.
What I object to are socialists coming after me in retirement because they want more. I’ve been fortunate yes, but being in a position to be self supporting in retirement is more than just that. It is because I’ve made choices and limited or forgone some present consumption and I’ve invested and saved.
The same cannot be said of many who just want to take more of what you have, because they don’t feel that you should have something they have not.
I’ve no problem supporting the genuinely needy in society.
I do have a problem with the “leaners” that want a lifestyle they’re not prepared to work for or pay for.
I wonder how many of them will get a lifetime pension, indexed to CPI, having paid little or no effective income tax for all their “working” life.
By all means tax the income on our superannuation. But don’t then tax it on the way in and the earnings. No other country in the world would tax super at every turn.
Allow people the dignity of being able to support themselves in retirement.
If more $ is required to run the country, then focus an cutting bureocratic waste and for God’s sake have the guts to reform the entire tax system, not just tinker constantly at the edges and destroy what little confidence there is left in superannuation.
Australia, a socialist country pretending to be a democracy!!

Chris P.
March 22, 2018

Great article. I agree in parts to comments made by Ramani, John & Gen Y. However, Gen Y is a bit harsh with comments relating to John's circumstances. Firstly, its almost impossible to make judgement on "fairness" half a century later.

In years gone by many Australians particularly migrants who accumulated substantial wealth mainly investing in real estate for their retirement deprived themselves by selling low, gifting or rearranging their affairs to qualify for the age pension. The reason they did this is simple to explain, they were upset because after paying Income, Provisional & Land Tax etc their disposable income was not much more than their friends who were on the age pension without the hassles. There was no Super or other facility obvious to them to retire comfortably.

So, in my view John should be commended for self-funding not criticised for to-days Govt financial mess.

March 22, 2018

I have been appreciating Warren's comments on this as 99% of people still seem to be missing the point (s).

To repeat a couple of his points, people arguing in favour of Labor's proposals are almost always effectively saying either:
Dividend imputation is unfair (and a lot of people to to check a dictionary for the meaning of "imputed"); or
Allowing retirees $3.2m in assets that don't pay tax is unfair.

Both of those statements may be true!

But that is NOT Labor's proposal. Labor is still OK with dividend imputation for basically everybody except for SMSF investors (there will surely be an allowance of a few thousand cash back to stop the genuinely poor being affected). And Labor is still OK with the first $3.2m in assets being tax free and you getting the imputation credits in cash if you are with a bank or industry super fund, but not with a SMSF.

There is absolutely no way that either of those positions can be validly argued and I suspect Labor doesn't even realise what they are proposing.

One area of confusion that is still floating around is the tax treatment of pooled funds (industry funds or the banks). If you are a retiree in a bank owned allocated pension product that invests in a high dividend Australian share option and the underlying shares earn 2% p.a. in franking credits, your account balance goes up by 2% p.a. because of those franking credits and you can ask for them to be paid out in cash each year. And while I have no direct experience with industry funds I have no reason to think this isn't be the case for them as well.

This means that the budget benefits being quoted by Labor are completely unachievable. If bank owned pension funds can deliver 2% p.a. more than an SMSF investing in the same assets, it is going to be very hard to justify not switching the Australian equity assets into a pooled fund. If the assets are switched to a pooled fund the franking credits will continue to be refunded in cash, and there will be no improvement in the budget deficit.

Alan U
March 22, 2018

Also LIC's to be replaced by Managed funds that have capital gains as the preferred "income" rather than dividends . Distribution of CG's will mean you don't sacrifice the franking credits.

March 22, 2018

On life-time equity, I did not notice or indeed any protest from the over 60s when super was made taxfree for them and excess credits were made refundable by Costello. Given estate planning legal loopholes, life time does become inter-generational. We accepted it as fair and equitable.

As fairness goes with equity, please read my AFR letter of today 22 March talking about member cohort inequity that must be addressed.

May the many festive kites swirling above (including mine) cloud the skyline with a riot of colour!

March 22, 2018

This is the best article I've read about this issue.

The problem is that most people will rely on either the words of Bill Shorten (who doesn't appear to understand what he's proposing) or the "copy-and-paste-this-press-release" style of much mainstream media reporting.

One of my very-low-income elderly relatives is supremely confident that she won't be affected because she's heard that it's only targeting the well off. She's wrong. She will lose hundreds of dollars a year. We are not game to tell her. I know it's the coward's approach, but chances are the policy will be dropped, not survive the senate or end up including a vast, complex array of exclusions and compensations that will get her off the hook. It's not worth the risk of having her cranky for the next year or so. One of those risk/reward trade-offs.

Warren Bird
March 23, 2018

Thanks Phil. One of the reasons I put this together (and something similar I posted on my LinkedIn profile) is that a lot of people seemed to be struggling to understand the issue. I believe that the way it's been handled by politicians and the media has shown a rather disturbing lack of any search for the truth. If my article has given a few readers a better framework to consider the issue, then it's been well worth the effort.

Errol Davey
March 22, 2018

Unfair, Why should someone with a passive income in retirement(outside of super) of $110,000 and a portfolio of fully franked shares pay no tax,but someone with a small SMSF of $1,000,000 loose all their franking credits.

March 22, 2018


They do pay tax - their tax accessible income is 'grossed up' to include the value of the franking credits; then tax at their appropriate marginal rate is calculated based on the higher accessible income - franking credits are used to offset some/all of that personal income tax obligation. It's about the equity of not having the same income taxed twice (i.e. at the company level & then at the individual level).

March 22, 2018

Ray the point l am trying to make is that someone with a taxable income can offset their tax liability with franking credits and pay no tax,that's a full refund of franking credits.
Not to worry Labors got Buckley's chance at the next election!

March 22, 2018

In 2008 didn't Ken Henry suggest a 7.5% flat tax rate for all super on along the lines of a TTT model?

This would seem to be the solution to many of the problems, including the recent ALP proposal and the perception of inequity between the age groups?

Not all of them I know, but would some way to doing so, in a fairer way.

March 22, 2018


I agree entirely, then the only argument will be around the rate, 7.5%, 10%, 12.5%, 15% or whatever. A much fairer system all round.

Self Funded Retiree
March 22, 2018

Possible consequences if Labour's franking policy is introduced.

1.Sale of dividend paying shares (Banks, Telstra etc shares prices under more pressure) by SMSF's.

2. SMSF cash transferred to Pooled Funds including Union run Industry Funds.

While Labour is not yet in Government and legislation is far from being passed, the fact that Labour has raised this makes me wonder if I should start implementing the above strategy to get in ahead of the rush.

March 22, 2018

Warren you are exactly right, the issue is not the refund of unused franking credits but the fact that some people with significant income from superannuation pay no tax. This attempt to tax them by removing the refund of franking credits is clumsy and unfair.

Pensioners in Industry Funds and in fact Retail Funds will be unaffected by this policy because the Funds use the pensioners' franking credits from their dividend income to offset the 15% tax on accumulation members contributions and earnings. The Funds do not merely expropriate pensioners franking credits and give the benefit of them to accumulation members, the pensioners still receive the benefit of them and the cost is charged to the accumulation members. The result of this is that members of self managed super funds are treated differently and are worse off than members of large Industry Funds and Retail Funds. This is patently unfair.

The solution is to tax all superannuation pensioners and leave dividend imputation alone. The only discussion should be around the rate which should be concessional to encourage investment in superannuation and ant tax free limit.

March 22, 2018

Hi Graham,

Thanks for a brilliant weekly read - it is the highlight of my weekly financial reads!

I have been following the debates about franking credits in SMSF pension phase with great interest (Discalimer: I am one of those who are adversely affected by the proposed changes).

It seems to me that the philosophical problem is one of getting a tax credit when you are not liable for tax.

Isn't this exactly how the Australian Super system was designed to work? Under the original design, tax is paid going in (contributions) and whilst in the fund (income/interest) but tax free when retired: the so called TTN model.

My understanding is that the majority of the rest of the world has set up a NNT system i.e. the reverse of our model and pensions are taxed using the standard marginal tax rates.

This current debate would be avoided if we used an NNT model.

Would one of your learned contributors like to do an analysis of the two different systems? What are the advantages and disadvantages of the two?

It may well clarify why most retirees are upset at the proposed changes.

March 22, 2018


When the superannuation system was first set up it was NNT, nil on contributions, nil on earnings and 30% on amounts withdrawn. Paul Keating decided that he couldn’t wait 40 to 50 years for his tax so he changed it to TTT, 15% on contributions, 15% on earnings and 15% on amounts withdrawn, same result but the timing of tax receipts was changed.

Peter Costello decided to remove the 15% on amounts withdrawn, resulting in many superannuants in my opinion paying insufficient tax. The new Labor policy is using a sledgehammer to crack a nut giving an unfair and clumsy result with differing consequences for superannuants in different situations.

The fair approach is to reintroduce the 15% tax on income from superannuation for everyone and leave dividend imputation as it is. If you were to find that this results in you paying more tax than you would under the normal income tax regime, you remove your investment from super and hold them and pay tax as any other investor

March 22, 2018

Warren Bird has done an excellent explanation on how the franking system of dividends works. The franking system is fair and equitable to all Australians as it currently stands.

March 22, 2018

Fairness is a complex concept. The current state is fair if we focus only on paid and attributed taxes relative to taxayers.

But when the broader facts are, as they must be, included (family home exempt from CGT and Centrelink; over 60s get tax exempt super benefits regardless of size; no inheritance or gift taxes; professionals game the system with family trusts; unfunded age pensions and pblic service super; clever and criminal advisers help evasion; self-assessment system is actually inmates running the asylum), we have designed a system that struggling workers (who produce real goods and services that underwrite the demands from the paper savings of nonworkers as the dependency ratio - workers to total people - worsens) must bear an unacceptably large part of the burden.

As it is, a senior on $200,000 pa (including exempt pensions) can pay no tax while his son with a young family on $60000 pays 40% marginal tax including medicare. Fair?

Governments have an obligation to look far into the future and facilitate sustainability. Not for them the Keynesian fake assurance 'in the long run we are all dead'. If they don't we are inviting social upheaval, glimpses of which we have seen in France, Detroit and California.

Responsibility without accountability is an invitation to be irresponsibly unaccountable, as every opposition has shown.

March 22, 2018

I agree with Warren's analysis.

I also agree that on the face of it, Ramani, your point about tax payable by the senior seems unfair relative to the tax paid by the senior's son. But Ramani, you are right that fairness is a complex concept. My own situation is quite similar to that of your sample senior. But what about the massively redistributive amounts of tax I already paid, when I was in the workforce, which probably went towards subsidising someone earning $60K? And what about the $700K age pension liability that I have saved the government, that someone on $60,000 is unlikely to do? I'm not so sure that on a lifetime analysis your equity observation still holds up.

Gen Y
March 22, 2018

Ramani, you are correct. The commentators are trying to apply a technical definition of fairness to what is really a societal issue.

John's comments are typical of those who have been lucky enough to accumulate vast sums of wealth based on the favourable policy gifted to this generation. The "I've paid tax my whole life, why should I pay tax now" argument cannot hold true with ever increasing life expectancies and aging populations, there simply are not enough tax payers to carry you through the 30+ years of your retirement.

John B
March 25, 2018

Ramani - the son on $60k has a marginal tax at 32.5% plus Medicare not the quoted 40%. In any case he might have some work related deduction etc. Without any deductions, his total tax rate is 18.4%

March 22, 2018

I am not an accountant and would welcome any comments on this but there may be another example that is relevant here.

Person D is semi-retired, but runs a small business with a company structure that brings in a net profit of $17,500 a year.

The company would I assume have to pay the $5,250 tax and would distribute the $12,250 to Person D. Person D would have a franking credit from his company for the $5,250 but under the proposed system would no longer be able to receive this.

Is this correct or are small companies treated differently to large ones.

March 22, 2018

@Laine - Person D could just pay themselves a salary of $17,500/yr so that the company makes no profit.

The real issue is with SMSF members losing out on 2 levels.
1. Impact on accumulation phase - lower income and the compounding effect on asset-base
2. Loss of income in pension phase

March 22, 2018

This simplifies Labours policy proposal so that I doubt any one could argue with the article. It is definitely a tax on small investors and I it will have unintended consequences. Small investors will move more to social security and larger investors will move assets.
This has a long way to go - Shorten has to get elected (after giving Turnbull this free kick)then the legislation has to be passed. If we get to this stage the fallout may force a backflip such as Keating's backflip on negative gearing.

Rick Turner
March 22, 2018

Gen Y should note the large franking credits stored up by the larger corporate tax payers as a result of the tax percentage associated with retained earnings, these are what get doled out in off-market buy-backs.

Part of the complexity of this issue is that, contrary to claims by the Treasury superannuation is not taxed at the individual level

March 22, 2018

Well said Warren. You put my thoughts into detail - thank you. Oh, how I wish artificial intelligence would progress faster so we can have a government that actually uses logic.

March 22, 2018

Warren Bird's is the most cogent argument for full refundability of franking credits I've read so far. But, of course, cogency and logic was never part of BS's tirade against franking credits (please note, 'BS' in this case stands for Bill Shorten).

Gen Y
March 22, 2018

Warren, I agree the real issue is that there are far too many people paying no tax, thanks to pensions being made tax free. As you suggest our politicians don’t have the guts to make real reform here, and the noise made by vested interest groups over the last week proves changes of this nature will be political suicide.

I do disagree with your logic around franking refunds. If that logic holds true shouldn’t shareholders also be eligible for rebates on the share of tax paid by he company on its retained earnings? After all, dividends are just a payment of part of company profits to the shareholder. Why stop at the dividend component, and rebate the tax paid on the retained part of the profit?

March 23, 2018

I agree that the tax free superannuation over-generously commenced by Howard for an ever growing portion of the population is the underlying issue. And only band-aid complicated measures such as the $1.6m limit are able to introduced without committing political suicide. That aside, the proposed change to the imputation credit system will create imbalances and anomalies on who benefits and who loses which has created this stupid "class warefare" debate. I believe that you either have an imputation credit system and apply equally across all scenarios. Or you remove the Imputation Credits (as per what other countries have done e.g. Singapore) and use the tax savings to reduce the company tax rate. This would be a better debate to have, but also too high risk for a politician that is just looking at the next election.

Warren Bird
March 23, 2018

Hi Gen Y, conceptually you're not wrong about how retained earnings could be treated. But perhaps the first principle of what makes a good tax system is simplicity and what you suggest would go against that principle.

From the tax payers' point of view it would mean trying somehow to get data on income that they hadn't been paid into their tax return - not a simple exercise. There would also be, I suspect, some outrage that people had to include that sort of information in their tax returns. The economic reality that retained earnings on their shareholdings is income to them doesn't align with their experienced reality because they didn't get paid that income.

From the government point of view it would mean a layer of administration to align company figures on retained earnings by shareholder with what personal tax payers put in their returns.

A withholding tax levied on the company would be simpler.

But I'm glad my logic overall persuaded you about where the incidence of taxation sits and that it shouldn't be at the company level.

March 22, 2018

Has anyone done the modelling on the effect of the $1.6mill cap and the fact that some, in some instances, of the franking credits will offset the 15% tax payable on the accumulation balances. The large funds will still get the benefit of franking credits to reduce or eliminate tax.

March 22, 2018

That's why Industry Super didn't object - it meets two of their key objectives:
1. their members are unaffected because most pay tax and credits will be used/offset, and
2. SMSF's are targeted and will be under pressure.

Hey presto thanks vm Bill!

March 22, 2018

Also, much is being said about the large untaxed pensions being received out of SMSF's. These pensions are considered all income when they are, in part, a return of capital contributed. Often contributed without any tax concession. Why has it not been highlighted that in an industry fund you are charged 15% on concessional contributions but the franking credits are shared by all in the fund whether they made contributions or not.

March 22, 2018

I did some simple calculations to see the impact on disposable income benefits of saving for retirement after the removal of franking refunds from retirees. I have assumed that the Govt pension plus the maximum income before pension impact is the base as any couple can get this if they have not saved for their retirement. If you have saved for your retirement but only managed to accumulate enough to eliminate the pension ($821,250), what is the impact of removing franking refunds?

Comparing two couples who own their homes, the first receives the full Govt pension ($32,380) plus the maximum income ($7800) before pension is impacted. The other has managed to save the maximum assets of $821,250 which will eliminate the pension. They have invested the lot conservatively in fully franked dividend shares. Their dividend returns are 5% ($41,062) and franking refund 30% ($12,318).

To assess the impact on the disposable income achieved from a lifetime of saving to accumulate their savings its fair to not count the pension as both parties could be eligible for that.

In this scenario the couple who have saved modestly for their retirement cop a 62% loss of disposable benefit from their investments from the removal of franking refunds. This leaves the couple who have saved for their retirement with a disposable benefit of $882.

March 22, 2018

Excellent explanation, thank you! Just a shame politicians can’t be persuaded.
Guess it falls under the adage of never let the facts get in the way of a good story or in this case an unfair tax grab!

March 22, 2018


Extremely well articulated. Facts are facts after all.

March 23, 2018

Excellent article, should make Bill Shorten and some of his mates read it.

It just demonstrates that many of our politicians have NO financial literacy.


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