Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 247

Labor's new franking policy is unfair to LICs

The Labor Party needs to articulate how it will treat shareholders in Listed Investment Companies (LICs) fairly under their proposal to deny refunds for excess franking credits.

The current system of taxation of dividends ensures that Australian resident shareholders are taxed at their applicable rate of income tax on dividends received from companies, rather than a minimum of the company tax rate. Denying refunds for excess franking credits will require complex changes to legislation to maintain the existing policy of allowing shareholders in LICs to effectively receive the CGT discount on capital gains earned by the LIC.

When a LIC earns a capital gain it pays income tax on the capital gain at the corporate tax rate, typically 30%. When it pays the capital gain to the shareholder as a LIC dividend, the shareholder is taxed on the dividend and franking credit in the usual way, but also receives a tax deduction that represents the CGT discount the shareholder would receive if they derived the gain directly or received it from a trust.

Below is the analysis showing the calculations for an investor (super fund or High Net Wealth Individual) investing in a LIC or either directly in shares or via a trust.

Calculation of tax payable on a $10,000 capital gain by:

  • Super fund in accumulation phase invested in an LIC (Super-LIC)
  • Super fund in accumulation phase invested in a trust or direct shares (Super-Trust)
  • High net worth individual (HNWI-Trust)

Currently, they receive a refund of the excess tax paid by the LIC above their tax rate after the tax deduction for the CGT discount. Denying the refund of excess franking credits results in the shareholder paying 30% tax on the dividend. This is a 27% higher rate of tax on a capital gain than is paid by someone on the top marginal rate of tax. This means a super fund will pay at least three times that rate of tax on a capital gain distributed by a LIC when compared to a capital gain it earns itself or via a trust and 27% more tax than an individual on the highest rate of tax.

(That is, a HNWI pays $2,350 on a $10,000 capital gain. A super fund in accumulation phase pays $3,000 on a capital gain earned by a LIC. The difference is $650 divided by the tax paid by the HNWI of $2,350 gives 27% more tax payable by the super fund).

Given that a large percentage of investors in LICs are super funds and that many investors in LICs are not wealthy, this is an inequitable result that will need to be addressed.


Howard Badger is a Partner in Tax Consulting at Pitcher Partners. This article is general information that does not consider the circumstances of any individual.

Michael Newman
April 13, 2018

So why did Costello change it from Keating's original purpose and at what cost to revenue since and how did it work before the changes?

Daryl Wilson (Affluence Funds)
April 09, 2018

Listed Investment Trusts such as recent IPO Magellan Global Trust (MGG) are a much better structure than an LIC. A LIT pays no tax, just passes on any taxable income (plus any franking credits received) to the end investor in the same way as an unlisted managed fund.

This is a much more efficient system and avoids the situation described above. In addition, it means any discounted capital gains can also be passed directly through - in our experience very few LICs actually state the capital gain portion of dividends and thus investors get very little advantage from the tax deduction.

Don McLennan
April 09, 2018

Shorten's original plan was to only allow Franking Credits to used to pay tax.
Bill quickly changed so now SMSF in the pension phase are about the only sector to be hit by
this measure.
Most members of a SMSF in the pension phase with a balance below $1.6m could lose their "credits". In my case i will lose 20% of my income. In fact i would be better off paying the 15% tax which those in the accumulation phase
Most high wealth individuals that Labor aims to target probably have over $3m in "super".
As an adviser i would advise them to reduce their holdings of companies paying fully franked dividends in their $1.6 section Holding these in their section paying 15% tax
Many will be able to use all their franking credits in this section
So it seems that some of the middle class who have saved hard & are now self funded retirees will be the group mostly hit.

D Ramsay
April 12, 2018

Well said.
Additionally why doesn't the Labour party be honest and only go after the ones they really want - namely the folks in SMSF's that have >$1.6M in super and put in a means test that exempts those that are below the above threshold from losing their franking credits.
I believe the figures are such that 97% of folks receiving franking credits are on annual taxable incomes of <$87K.
Labour discourages people from being self funded in retirement.

April 06, 2018

Another unintended consequence for the new policy to fix.


Leave a Comment:



The options to gain equity exposure with less risk

8 ways LIC bonus options can benefit investors

Know your fund types and structures – an acronym odyssey


Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.


Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.


Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.


10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.