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Impact on pensions and super from loss of excess franking

The drums of class warfare seem to be beating loud and clear after Bill Shorten’s announcement that a Labor Government would stop refunding excess franking credits received from Australian company dividends. This announcement comes on the heels of Labor’s proposal to reform negative gearing, reduce the CGT discount and tax family trusts at a minimum of 30%.

Dividend imputation prevents investors being double taxed, once at the company level and again at the individual level. The franking credits allow individuals to reduce their taxable income by the amount they paid in corporate tax as a shareholder. The Keating Government introduced this policy, however the Howard Government extended the policy by refunding any franking credits not used to reduce taxable income. Labor is not ending dividend imputation, but is rather returning to the imputation system envisaged by Paul Keating.

The new (or is it old?) policy will have no impact on investors paying a higher tax rate than the company tax rate, since they don’t receive franking credit refunds (see Table 3 below). However, for investors who pay a lower tax rate, the removal of the refund policy renders some or all of their franking credits worthless, lowering their after-tax income (Tables 1 and 2).

Political posturing begins

Unsurprisingly, the Liberal Party is crying murder, with Treasurer Scott Morrison describing the policy as “a brutal and cruel blow for retirees, for pensioners”. This is the Treasurer who introduced balance limits on superannuation accounts and capped non-concessional contributions leading to higher taxes for wealthier investors. Each side of the aisle is employing a healthy amount of spin after the announcement. Labor is claiming their policy is not a tax increase, but it’s not a stretch to say that removing a measure to prevent double taxation is effectively a tax increase. The Liberals are calling it a $59 billion tax grab, which is the expected value of the foregone refunds over 10 years. Why stop at a decade? It’s a half trillion dollar tax grab if we extrapolate over a century.

An interesting development will be that if Labor removes refundable franking credits, changes in the corporate tax rate will affect the after-tax returns of investors with a lower tax rate than the corporate tax. As detailed in Graham Horrocks’ article in last week’s edition of Cuffelinks, the corporate tax rate currently has no impact on the after-tax income because higher rates render higher franking credits and vice-versa. However, if investors paying little tax aren’t able to realise their franking credits via a refund, they will benefit from lower tax rates that increase dividends and thus reduce franking credits (i.e lower corporate tax rates = higher returns for low tax investors) (Table 4).

SMSFs may change asset allocations

The Labor announcement has caused some to warn that the policy will drive SMSF investors from listed shares to income-paying assets such as REITs and direct property, driving property prices further up. In an interview on The Today Show on 14 March 2018, Bill Shorten acknowledged this possibility, adding that Labor would make “improvements in property investment to make it more attractive to invest in new housing”. This statement may come as a surprise to many, since Labor is promising negative gearing reform to promote housing affordability. All things being equal, an asset reallocation may occur, but all things are rarely equal, and a Labor budget is almost certain to target property investors despite Shorten’s recent comments.

A key consideration for all investors is how the policy will affect dividend payout ratios in corporate Australia. Classical financial theory suggests that lower payout ratios would result in higher share valuations, since companies keep more capital to re-invest into growth opportunities. However, this relies on the assumption that Australian management can invest additional capital wisely. This week’s hearings from the Royal Commission suggest this may be a somewhat heroic assumption.

Tables showing impact of removing refunds at different shareholder tax rates

Source: Stanford Brown calculations

The tables assume Australian shares paying fully franked dividends are the only investments held by the relevant shareholder, so for example, there is no other taxable income to reduce by using the franking credit. It's worth repeating that Labor is not proposing to abolish dividend imputation, but rather the refunding of excess franking credits.

The examples show the material impact of the proposed policy on after-tax income of a pension or super fund holding only shares paying fully-franked dividends.


Nicholas Stotz is Investment Research Analyst at advisory firm, Stanford Brown. This article is general information and does not consider the circumstances of any individual investor.    


Back to basics shows franking credit refunds are fair

Franking policy may increase corporate tax avoidance

Two Labor policies facing inadequate scrutiny

John Griffith
April 26, 2018

The aim of a tax on dividends should be that the ultimate receiver of the dividend should be responsible for payment of tax on that dividend at that particular taxpayers tax rate. Any thing else brings in the prospect of over/ under taxing.
Franking credits are only a mechanism for achieving the above goal. Franking credits serve no other purpose than ensuring tax is paid at the receivers tax rate.
I can’t see how you can go past that.
I can,t see how any other system would not create potential distortions. Even with the current fake-news hysteria about FC’s is fueled by ignorance and mis-information.

April 26, 2018

John, you are spot on in what you say. I do not understand how some people get the idea that company tax is a tax paid on behalf of shareholders. It is not. Company tax is a tax levied on company profits under the company tax regime, simple as that. Keating's original imputation system was designed purely to prevent the double taxing of the same "income" in the hands of shareholders, albeit that "income" is in a different form ie dividends rather than profits. It was never intended to provide refunds for shareholders.

Howard and Costello changed that big time in 2001 in changing the system for taxation of pensions. I and my colleagues could hardly believe our eyes when we saw what they had done. We thought it was overly generous and recognised that it would eventually open a pandora's box which would be hard to reverse if it was allowed to continue. Whenever you give somebody something for nothing it is always difficult to reverse the situation.

But continue it did and lawyers, accountants and financial advisers have made a motza setting up and managing an ever increasing number of SMSF's, often with trustees who have little or no knowledge of their responsibilities. Believe me, I have seen it!

For those thinking I have a biased view let me tell you I am a Liberal voter, a retired tax accountant and my SMSF receives tax refunds from unused franking credits. I just happen to think it is illogical for a Government to collect tax one year in the form of company tax and then pay some of that tax collected as a refund to some shareholders in a subsequent year when they themselves have not paid the tax! It becomes a form of welfare!

John Griffith
April 28, 2018

Geoff, Sorry but I believe excess franking credits should be refunded. I see no logic in not refunding excess credits. You either have a system of determining the tax on dividends at the tax rate of the shareholder, or you don't. We do.

As you say, when the tax is paid by the dividend payer it is Company Tax.However, as soon as the dividends are paid it all changes. The change is evident by the very issuance of the franking credits themselves. The shareholder becomes liable for the tax on not only the dividend but also the value of the franking credit. At that time the franking credit belongs to the shareholder. Full stop.

Now, if that shareholder has no tax to pay- a refund should be given, just as if extra tax is payable it must pay.

Just because we have zero-tax rates for some in this country, the tax rate of the shareholder should have no bearing on whether a fc is refunded or not.

It was wrong for refunds not to have been included at the start of imputation, but that has since been rectified. I notice you credit Howard and Costello for the change, but refund of excess franking credits was a policy Labor took to the 1998 election, and Labor had no problem signing off on it in 1999.

As reported in The Australian, March 18, 2018 "Labor strongly backed the Howard government’s introduction of the dividend imputation concession in 1999 and attempted to claim credit for it as ALP policy that benefited low-income ­investors, including retirees.

Then opposition Treasury spokesman Simon Crean said during a debate over the New Business Tax System (Miscellaneous) Bill that the move to refund excess imputation credits was part of Labor’s platform in the 1998 election.

“We have no difficulty supporting the proposal because it is our policy,” Mr Crean said.

“It builds on the major reform accomplished by Labor almost 15 years ago and it improves the current taxation situation faced by low income investors, ­especially retired Australians.

“Labor included this proposal in our taxation policy prior to the last election.”

If you have imputation it should work uniformly for every shareholder.

If you have a zero-tax rate it should be zero.

You can't adjust on by fiddling with the other.

Excess FC's should be refunded

March 24, 2018

If Labor were to win the next election and legislate the "no refund on excess franking credits" how would closing your SMSF and transferring everything to a public pool find benefit the superannuate?
I understand that large public pooled fund would have many (most) members paying tax on their accumulation accounts and therefor allow the claiming of most if not all of the franking credits for a particular year. However how are these credits distributed to members in the fund. Would those members with pension accounts only (paying no tax) get the same franking credit as they were getting in their abandoned SMSF.

John Griffith
April 28, 2018

I have wondered about this myself. If all members who have excess FC's had their accounts credited with the value of their FC's and tax paying members had their accounts debited by the amount of their individual tax, you would be good, provided all the excess FC's were less than the total tax payable by the fund. BUT, I don't know if any funds work that way- yet ?

Don Taylor
March 23, 2018

Len, the company has paid the tax to the ATO.

Bill Donald
March 23, 2018

Len Liyou, you obviously can't understand the basic facts, goodbye.

March 22, 2018

I don't understand why 'industry funds' are unaffected. If I invest in an 'Australian equities' option via an industry fund will I receive credit for the 'excess' franking or not? If not where has that money gone to?

Graham Hand
March 22, 2018

Hi Ken, Labor's proposal is not to abolish imputation and franking credits, but to remove the refund of excess credits. If investments are held (in a pool or by an individual) which produce taxable income, the credits can still be applied against this other income. In the case of pooled industry and retail funds, they hold other investments such as bonds, property and unfranked dividends which will use the franking credits to reduce the tax payable.

Ian A
March 22, 2018

Possible ways to minimise the damage? It appears most public offer funds won’t be affected by this change. Labor and their union mates sitting on the boards of Industry Funds have always hated SMSFs. This change is targetted specifically at SMSFs.

I’ve been a great supporter of LICs for a long time but they could be negatively impacted by this change. The unit trust / ETF / LIT structure would likely become more popular especially in the Super environment.

March 20, 2018

What has not been factored into the above discussions is the possibility of companies changing the amount of profit paid out as dividend and retaining an increased amount of the profit in the event that franking credit is changed or abolished. Thus increasing the company's intrinsic value which may flow on to share price increases.

Graham Hand
March 20, 2018

Yes, Peter, but see Graham Horrocks' article on why this is unfair to pension and super investors. The value of franking credits is only lost if there is no other income to use it against.

March 19, 2018

Thanks Graham but why will investors go to REITS and unlisted property as you say in your newsletter?– what extra tax benefits do they have?

Graham Hand
March 19, 2018

Hi Paul, The argument is that given a choice between say a 5% fully franked dividend on shares versus 6% on a REIT, a person with an SMSF in pension phase will choose the shares at the moment because it carries a franking worth 2.1%. Total cash return 7.1%.

But if the franking is lost, better to take the 6%.

Same argument for high-yield bonds. On the same day Shorten made the announcement, I received two emails from fixed interest brokers arguing pension SMSFs should now hold bonds instead of shares with franking credits.

Cheers, Graham

March 19, 2018

Ok got it thanks Graham thought I had missed an additional tax advantage with REITs…

March 20, 2018

That's what makes Shorten's supposed budget "savings" illusory.

Other personal (outside SMSF) strategies that could easily change or disappear in an effort to use all the franking credits up would be claiming deductions for personal super contributions and/or interest payments on share gearing strategies.

Should the changes become law, as there would be no need to generate tax expenses to maximise franking credit refunds any more, simply cease the above and the taxpayer will then be able to use up all the available franking credits to $0. Sure no refund, but at least all used up and not wasted.

Peter M
March 19, 2018

Chris Bowen said on 7:30 that industry and retail super funds will not be affected. If this is the case many retirees are likely to close their SMSF and transfer the funds to an industry or retail fund. What will this do to the proposed $59 Billion saving to the government?

March 18, 2018

As a SMSF trustee with respectable assets after a lifetime of working two jobs and never accepting a cent of government money while earning the average wage, comments such as those from Gen Y make me sick although they are typical of a generation who spend all their money and blame others for their predicament.
I for one will be looking at my options including investing in more Reits, overseas shares, overseas direct property and using other entities.
None of those options will benefit the Australian economy. Couple this with Shortens other poorly thought out policies and we will finish up with a loss of foreign investment, shrinking economy, increased social security, increased debt, increased property investment and increased unemployment all so he can waste the sugar hit he may get. It is the modest SMSF I feel sorry for where they may be forced into more or total pension.
I would back the brain power of the big end of town anytime over Shorten, so I don't see this ending well

March 18, 2018

It is interesting to me that if I (a self funded retiree with limited income) and Bill Shorten both buy shares with dividend imputation then Bill will get tax credits for the tax paid by the company but I won't! However he justifies ripping off the poor to pay the rich by giving only examples of millionaire Retirees.

March 19, 2018

With the greatest of respect, Rod, we'll ALL be self funded retirees with limited income, especially Gen X / Y and millennials, simply by the way that things are heading.

When the former groups retire, there won't be a pension per se, and even if there is, it will be so low and subject to so many conditions and asset tests (including your own home), you won't want it anyway, simply as a function of the tax base...there just won't be enough money to go around.

Super may well be the proposed silver bullet to fix all this (i.e. look after yourselves everyone), but again, you are subject to how much your assets returned while you were working and how much you can put into it while you were doing so, all the while, the goalposts are changing and eroding any long-term confidence in the system.

March 18, 2018

Here's my solution:

Len Liyou
March 18, 2018

Most people who salary sacrificed % of their salary to put into super did so to dodge tax. You cannot have it both ways, anyhow you did not pay the 5000$ in the first place, it is not a REFUND if you pay no tax.

Warren Bird
March 18, 2018

No no no and no. It is not “dodging tax” to take advantage of a tax policy designed to encourage a certain type of behaviour! If you think that then you have little idea how a modern society actually works, with governments seeking outcomes through what they do. You might as well say that someone who spends their pension is cheating because it wasn’t their money in the first place.

And just because the legal veil that is the company structure paid tax on your income before they shared it with you does not mean that you didn’t pay it. That is the whole point of the imputation system. It’s not about giving tax back that should have been paid, it’s about getting the right amount of tax paid in the first place.

Most of the arguments against zero tax rate individuals getting franking credits that I’m reading are actually arguments against the whole dividend imputation system. For if you accept that zero tax payers shouldn’t get a credit then 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 irrrespective of their tax rate, is just 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 all of these errors of perception about the incidence of taxation, about who should pay what. 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 raise the same revenue. Exactly the same. The only difference is that you don’t have companies acting as tax collectors for the government and then most of that tax being paid back to shareholders via imputation credits. But apart from a bit of a saving because companies don’t need to employ as many accountants, these are economically identical.

Which brings back to point I made earlier. If it’s Budget revenue that needs to increase and there’s a view that some tax payers should pay more, then change their tax rate and be explicit about who you are taxing and why. Don’t hide behind erroneous thinking and bad policy like the idea that Mr Shorten unleashed this week, from which he’s already had to backtrack in relation to many zero tax rate people who he didn’t mean to hit with this change, such as charities.

Bill Donald
March 20, 2018

Len Liyou, by your "logic" you don't pay any tax either. Your employer pays it on your behalf. My "employer" the company I have invested my life savings into, also pays tax on my behalf. Exactly the same thing, why do you people find such a simple thing so difficult to understand?

Don Taylor
March 20, 2018

Len, the tax refunded is excess tax paid on the shareholders behalf by the company. This is the principal established by Keating. The refund is because the dividend has had tax deducted at 30% and is adjusted via the taxpayers tax return. If the tax payable on their taxable income is less than the tax already paid then they get a refund of the excess...just like every other tax payer!

Len Liyou
March 21, 2018

Don, the companies cannot pay the taxpayers excess, simply because they would not know what the shareholders would have to pay, the thing is nobody has paid for the so called "refund", just the ATO.

March 17, 2018

Retirees with up to around $1m saved may no longer benefit from having the money in pension mode super if they have some or all of their investments in company shares.

Here is an example of how this works.

Suppose they have $200k in cash earning 2.5%, $200k in investments paying 6% unfranked (eg REIT's) and $600k in companies paying 6% franked dividends.

Their income is $5k from the cash, $12k from the unfranked distributions and $36k from the franked dividends, plus $15,428 in franking credit. Total income $68,428.

If they hold this outside of super, the tax owing is $15,155. This is less than the available franking credit so they would pay no tax.

Their take home pay is $53k.

If they hold all their investments in pension mode super then they would have exactly the same take home pay as they would get no benefit from the franking credit.

These retirees will soon realise that they can save the cost and hassle of running a super fund and will take their money out of super. As well as saving the retiree around $3k per year, this will also save their heirs the 15% tax on the untaxed portion of their super when they die and it will make it much less complex for their heirs to wind up their estate.

This is for an individual. For a couple you can double these investment amounts.

This is one of the unintended consequences of the proposed changes. Some people will choose to drop out of super altogether.

March 18, 2018

If the rules were later changed to become more advantageous, it may be difficult to get back into super due to limits on contributions and/or having to satisfy a work test.

March 17, 2018

Yes, there will be unintended consequences that need to be fixed. However, let's look at a retiree couple over 60, both with a superannuation pension from their SMSF, with $1.7m in fully franked shares and $300,000 in term deposits. At an average dividend of 4.5%, their fund can receive $76,500 in dividends which are completely tax free. They will then receive an additional $32,786 tax rebate, which is what all the fuss is about.

If they don't like Labour's new policy, they can sell their share portfolio, once again completely tax free, sell their existing home and use the proceeds to buy a harbourside mansion. They will then receive the full age pension, plus the interest from the term deposit. When they die, the harbourside mansion is passed onto the kids tax free.

At a time when the Budget is in deficit, when hospitals, schools, roads and railways need to be built, I think we baby boomers need to get some perspective

March 17, 2018

They (politicians) are quick to tax everyone but themselves. Politicians and Public Servants, have a fully funded (The Future Fund) Defined Benefit, fully indexed for life, pension plan. All the adverse changes they make to everyone else's superannuation does not affect them! That in a nutshell is the problem. The people making the adverse changes are not affected by those adverse changes! This is what needs to change in order to bring equity back into the superannuation debate. The money they (politicians) want to take from pensioners belongs to those pensioners who have already paid tax on that money; it's not the government's money, it is the collective savings of those pensioners. It is stealth by legislation. It's high time an advocacy group representing ALL pensioners was formed to address this issue alone.

March 19, 2018

Correction (and with the greatest of respect Peter), those public servants lucky enough to be on the 'old scheme', a.k.a. DB or Defined Benefit are sitting pretty; everyone else after the mid 80s or thereabouts (depending on the State / Territory) is on the DC or Defined Contribution scheme, which is not only subject to the vagaries of whatever you're invested in, but also, how much you can shovel into it while you're working.

The "old scheme" is only open to the top brass, top High Court judges and politicians and that's if you're lucky enough.

July 09, 2018

Not quite right, I know several public servants over the age of 60 who pay tax on their CSS pensions. The reason is these pensions are from an untaxed source (i.e the 15 % super withholding tax was not made because there was no employer support until after retirement).

Their situation is their pension is taxable at their marginal rate, but they get a 10% tax offset.

So they are over the age of 60 and paying tax on their super pensions.

March 17, 2018

I agree with Warren Bird observations and then Chris and others esp as reflected back by Graham Hand. At core, if the political class want to remove the zero tax status of super pensions then that should be the debate. As proposed by Labor and misunderstood by other comments here, esp Gen Y, this is not so much a taxpayer refund but a flow through of company profits to a tax payer of whatever level. And as such all of the dividend ought to be available to the zero tax payer. And as such Keating was wrong not to have the money flow though from the start. Then corrected by Howard and now offset by Turnbull with the tax fee limits. A problem, especially for Labor, is that no one expected the smsf world to take off as it has and Labor has an ideologocial opposition to the existence of smsfs.

So now we have this twisted idea. And it effects us all not just a select few. As stated elsewhere here, it effectively taxes dividend income at the corporate rate. A younger Peter Thornhill type who is building his accumulation smsf via ancient LICs only interested in the safety of Australian Industrial shares will surrender half of his income whilst his accumulation friend next door is having his own industry super account subsidised by the retirees in his fund. Does not pass the pub test of fairness as they say.

Bill Donald
March 17, 2018

I was planning on a "massive" $15,000 a year income from my dividends (so greedy and wealthy, I know) Shorten wants to take ANOTHER $5000 off me, so I'll now earn the obscenely selfish amount of $10,000 a year.

March 17, 2018

Why bother with super. Spend your money and enjoy life. Let the Government look after you when you retire. They just keep changing the rules

March 16, 2018

Not exactly. APRA funds, being pooled funds with a diverse membership base, will be able to make full use of the franking credits to offset all tax liabilities that arise across their membership base (e.g. contributions tax in respect of members who are still in accumulation phase). Therefore, the removal of refundable franking credits will not adversely impact them. On the other hand, SMSFs with generally one or two members only, will be limited in their ability to utilise excess franking credits (under a ALP Government) by the phase the members find themselves in. Therefore, a member of APRA funds in pension mode will be no worse off because pooled super funds had so many members still paying tax that they could make full use of all franking credits.

Hence, the target is not APRA funds but SMSFs.

Graham Hand
March 16, 2018

Hi Warren, thanks, your comment reproduced below is an interesting way to frame the issue:

"What it means is that the company tax rate is already zero. Domestic shareholders pay tax on the earnings that they get 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%.

If the company tax rate was zero and the government charged 30% withholding tax on all dividend payments to non-residents we’d be in exactly the same position as we are now."

Warren Bird
March 16, 2018

Thanks Graham. Of course, there's also a 30% withholding tax on retained earnings that I didn't mention, but is relevant.

So there are two withholding taxes, on foreign shareholders and retained earnings. Which fleshes out the two choices for deciding the rate of that withholding tax - we can go with
(A) an average rate of company tax overseas (to be competitive globally) or
(B) the average of personal income tax rates domestically (so that the withholding tax on retained earnings generates as much revenue as if it had been distributed to local shareholders).

Discussion of the merits and implications of each of these benchmarks is for another topic another day.

Rick Turner
March 15, 2018

Gen Y needs to go back to Taxation 101.

A principled tax pays attention to equity, efficiency and neutrality. This proposal is failing all three.

Around the world, super is encouraged generally by not taxing contributions and earnings but taxing drawdowns in pension phase while our system is front-end loaded because Govt couldn't wait for the revenue. Under this proposal our system will tax every stage, if you have an SMSF.

Gen Y
March 16, 2018

In this case our entire tax system fails all three:

Equity - A dollar of income earned is taxed significantly more than a dollar of investment income (CGT discount, div imputation, neg gearing, tax free pension).
Efficiency - Our tax system is so complex that entire industries have been built to navigate it.
Neutrality - We have been in structural deficit since Howard and Costello thought the Chinese Steel boom would last forever.

eric wells
March 15, 2018

Hi all, have read the above comments with interest, ( if you'll pardon the pun ). In my case, being a part pensioner, part self-funded retiree, this change of Shorten and Bowen's, will cost me around $4,800 in refunds.

Me, another nail in Labor's coffin, voting wise

Peter Worn
March 15, 2018

Thanks for the article Nicholas. Your thoughts that Australian companies may be forced to retain earnings, which in theory should push company valuations higher. This will really test the management of our ASX200 firms who by and large have sustained TSR underpinned by dividend payments without truly innovating or sticking their neck out. Bring it on I say.

March 15, 2018

If I recall, didn't the Henry Review propose a flat tax of 7.5% in all super , be it accumulation or pension.

It could have been phased in 10 years ago ...........and all these issues around caps, limits, SMSF vs Industry would all be done with and there'd be plenty of tax coming out of the system.

Of course , this assumes 10 year plus thinking

March 16, 2018

Spot on. That's exactly how it should have been handled IMHO.

March 16, 2018

Agree - make it (say) 10% tax across both accumulation and pension and the system would be much more sustainable (and less costly to run). Members would be able to keep the one account for life, rather than having to move from an accumulation account to a pension account. It would result in many benefits for members eg simplicity! And it would have no retrospective impact on fund members.

Jan H
July 06, 2018

If SMSFs paid tax regardless of being in accumulation or pension mode, expenses, i.e. accounting/audit fees could be deducted by both and franking credits would be used to reduce any residual tax owed to zero.

As it stands, those SMSFs in full pension mode pay no tax but cannot deduct expenses. Instead, they are refunded unused franking credits.

Under Labor's policy, SMSFs not only lose franking credits but the value of expenses unable to be deducted.

Gen Y
March 16, 2018

Yes, unfortunately there was a lot of great reform in the Henry Review that was too political to touch!

March 15, 2018

At a simplistic level, it’s not just about baby boomers, it’s about everyone and anyone (including Gen X, Y and Millennials) who has a superannuation account in either accumulation or pension phase.

If a company pays tax at 30% and the rate inside superannuation is 15%, that’s a 15% free kick on the money that is currently also going into those accounts from the refund of franking credits during accumulation phase. Obviously, pension phase is at a 0% tax rate, so those people will be hit too, but it affects everyone.

Graeme Bennett
March 15, 2018

I suspect for most funds in accumulation the franking credits will largely be offset against tax due on employer contributions and capital gains. In some years there may well be excess capital gains, especially if fully franked dividends make up a large part of a takeover consideration or the employee does not contribute that year. It's a fair point that the impact of the tax is somewhat random.

March 15, 2018

You are correct Chris, however most funds in accumulation phase will have other taxable income (other than fully franked dividends). That "spare" 15% in franking credits could be used to offset tax on the other income, i.e. they will receive the full rebate/benefit.

You could see a number of SMSFs add members that are in the accumulation phase (up to four members), e.g. children, to utilise these lost franking credits.

March 15, 2018

All the talk is about SMSFs and direct share investors. I assume the change would also apply to managed fund investors.

My mother-in-law gets a single government pension and her only investment on top of that is a very modest amount in an AMP income fund that includes franking credits in its distributions.

The only reason she does a tax return is to get the franking credits refunded - there's no other income to offset them against. Does this mean that the few hundred dollars she gets each year from this will soon be gone?

It seems that Mr Shorten's latest class war skirmish might generate some collateral damage amongst the wrong classes.

March 15, 2018

yes Phil, that's exactly what is means

S Hunter
March 15, 2018

Is it really the case that pooled (industry/retail) super funds (and indeed SMSFs also) can somehow use the franking credits from 'pension phase assets' to offset tax liable by 'accumulation phase assets'?

if so, how does this work and is accounted for? do the accumulators buy the valuable credits from the pensioners? under current legislation, why would the pensioners even bother since they can get the refund from the ATO?

If not, doesn't this mean that every super fund in the pension phase getting franked dividends (and paying no tax) would be affected by no longer getting refunds? that's a lot of people...

My expectation is that these two different sorts of funds should be completely separate and ring-fenced (at least from an accounting point of view) with their own appropriate investment strategies.

March 15, 2018

Tax of super funds is based on the earnings of the taxable entity. The fund, that can include accumulators and pensioners is the taxable entity, not the individual members.

Tax payable is gross tax assessed on contributions, earnings and capital gains less expenses, less franking credits.

The benefits of the franking credits can be allocated to those that generate them and the cost of any tax allocated to those whose contributions, earnings or capital gains result in tax.

I suspect this is why Mr Whiteley from the Industry funds was so sanguine about the announced Labor policy.

It will have no effect on the earnings of pensioners holding franked shares in industry funds (or retail funds for that matter) since the funds are a pool of accumulators and pensioners and the franking credits can be fully utilised.

March 16, 2018

Stephen, your analysis sounds correct except for when a super fund has decided to segregate its pension assets from its accumulation assets. I assume that in those cases the fund would NOT be able to offset franking credits from pension assets against tax on contributions and accumulation asset investment income. So in those cases all franking credits from pension assets would be lost? I have always been wary of the perceived benefits of pension asset segregation and this appears to be disastrous for those funds who have gone down this path - unless they are somehow exempted. Any comments?

Stephen Kunz
March 16, 2018

Michael, it's an interesting point. Currently, since the fund is the taxable entity, the segregation of assets does not restrict the receipt of franking credits.

How this will be dealt with under the Labor plan is anyone's guess. As you alluded they may seek to deny the use of franking credits from a segregated account backing a pensioner but allow franking credits from the accumulation account to the extent they offset tax generated from earnings on assets in that account.

However such a change would also likely affect the use of franking credits in pooled industry and retail funds (even though they are called"pooled" the individual effectively has a segregated account) and that would reduce the pensions of millions of people in such vehicles.

Their announced policy is simply to not issue cash refunds for unused franking credits. So if we take that at face value franking credits from segregated accounts could still be used to offset tax liabilities of the fund, as they are today, as long as they did not result in a refund of franking credits.

So yes it's an unanswered question.

March 15, 2018

The devil is in the detail. As noted in an article in the AFR, pooled superannuation funds (industry/retail) will still be able to avail themselves of the franking credits as they have taxable contributions and earnings taxed at 15%. As these funds also include those on superannuation pensions the Labor policy will result in the following anomaly.

Say two super fund pensioners hold $100,000 in AFIC shares one in a SMSF in pension phase, one in an industry fund in pension phase in one of their direct share offerings. Assume the dividend yield is 4.2%

The result in the SMSF is that the pensioner will get $4,200 (no refund of franking credit).

The result in the industry fund is that the pensioner will receive $4,200 plus $1,800 = $6,000.

The reason this will occur is that having received the imputation credit the industry fund can use it to reduce its tax bill on taxable earnings (it includes pensions and accumulators and is a pooled fund) so it will not be wasted. However the benefit for the reduction can be credited to the pensioner.

The Labor proposal is poorly thought out. Two super fund pensioners in exactly the same circumstances, in the same investment, will receive different outcomes.

Interestingly if a SMSF had a pensioner and an accumulator and could use all its franking credits, the pensioner could also be credited with the benefit of the franking credit.

March 16, 2018

Take that analogy one step further, in the context of Shorten's attack on the "wealthy":

1. SMSF has two members with, say, $6,400,000 in assets and two account based pensions valued at $3,200,000 combined (nicely 50% pension phase). This effectively reflects your pooled structure where half the income is taxed at 15%, where franking credits can be applied to this income.
2. SMSF with two members with $400,000, all in pension phase. (Shorten's battlers?). They will lose all their franking credits and will be worse off than the wealthy SMSF above.

Simon Law
March 15, 2018

Keating's franking legislation was designed to stop the double taxation of company profits. Howard’s changes created a situation where company tax already paid was given back to shareholders thus reducing the government tax income to less than the company tax rate. This was part of the great give away during the Chinese steel making boom that Australian governments of all persuasions are now attempting to unwind. It’s going to be painful!

Jan H
July 08, 2018

And, here is another give away: Apart from the $900 Labor gave every individual paying tax of $1 to cushion the impact of the GFC (regardless of gross income), Labor raised the tax-free threshold (TFT) from $6000 to a whopping $18,200. And, now Labor is promising even more tax cuts to wage earners at the same time it plans to cut the incomes of SMSF pensioners and all future Govt Aged pensioners post 28 March 2018 by 25 to 30% and anyone else who owns fully-franked shares and pays no tax by cutting franking credits cash refunds to them

According to Tanya Plibersek, Labor must end cash refunds for budget repair. If they were serious, they would roll back the TFT and forego any more tax cuts. Yep. that would be painful. And the cries of indignation from the GenY and Millenials deafening!

March 15, 2018

Is there an error in Table 2?

I would have thought that, for the 'Proposed Policy 0% refund' column, the 15% Tax payable (-$150) would still be able to be offset by the franking credit, thus leaving an After-tax income received of $850.
Or to put it another way, I would have thought that Pension phase (zero tax) would totally miss out on the benefits of franking credits but Super phase would at least still receive 15% of their value???

If I am correct, maybe the compromise column may also be incorrect.

Nicholas Stotz
March 15, 2018

Hi Rodney,

My apologies for inelegance of my tables.

The after-tax income is the value of the dividend received plus any refund paid out to the investor.

In table 2, the Super investor is being taxed 15% on the their dividend received + franking credits (700+300). This leaves a tax bill of $150. The investor can use $150 of their franking credits to offset this bill which leaves their taxable income at $0.

The investor will still have $150 of franking credits leftover, which is where the refund policy comes into play. The current policy refunds any excess franking credits, however, Labor's policy would render them worthless to the investor. This is why the difference between the return for the investor under the current policy is $150 higher than the return for the investor under Labor's proposed policy.

Please let me know if I've been unclear.

Many thanks,


March 15, 2018

Good luck Gen Y when you reach retirement age. Your super will not be enough to support even a basic lifestyle and you won’t get much joy from being a pensioner. Then you might not be so smug about self interest.

Gen Y
March 16, 2018

Yes PeterR, you are likely correct as my generation will long be funding the excesses of the Baby Boomers.

Jan H
July 06, 2018

Yes. Gen Y. One of the ways to cap house prices is to build smaller houses. Those greedy, selfish Baby Boomers mostly grew up in houses under 30 squares, many under half that - one bathroom, one toilet, no ensuites, no entertainment centres, no family rooms, no dishwasher, no aircon, and, until the sixties no automatic washing machine, and the kids shared bedrooms and God forbid, even slept in bunk beds. And, not everyone could afford to buy a house even back then.

Gen Y
March 15, 2018

The vested interests on this topic are sickening.

Can people not see that Howard and Costello’s 10 year cash splurge of our once in a century mining boom have placed the budget into structural deficit? The pension balance transfer cap and reduction in contribution caps was step 1 in repairing the damage. Capital gains tax discounts and dividend imputation are step 2.

Some SMSFs will need to now draw down on part of their capital to meet their living expenses... this is what super is designed to do! It is not designed as a tax free haven to hand your kids a nice inheritance, it is designed to fund your retirement. Eventually you will draw down enough that you may be even eligible for the government funded safety net to ensure you can remain in your own home and live a reasonable lifestyle in your later years.

We used to say ‘think of the children’, but in recent times the rhetoric has shifted to ‘think of us, the baby boomers, stuff the children’.

Graeme Bennett
March 15, 2018

Hi again Gen Y. I note your comments are self-interested as well, particularly with regards to property. We all have our biases and our circumstances will play into those biases.

I actually think all super funds should be paying tax, even for members in retirement. CGT rates can be re-examined but not in isolation, we also have to pay regard to what other countries do on the subject. We wouldn't want to see too many Atlassians move offshore due to more attractive tax regimes elsewhere (that wasn't the main reason for their move but it would have played a part).

Yes the intent was for superannuation to be drawn down over members' lifetimes. Few of us can say how long we will need to provide for though. And many of us are naturally savers. I don't have any children but my investing patterns are unlikely to be affected by that. Perhaps you could try being a little more flexible in your thinking and less prone to thinking in stereotypes.

Gen Y
March 15, 2018

Graeme my comments are not self interested. I’m not a property investor, I am lucky enough to own a house I live in (with a huge mortgage). My comments on property were facetious in that those with vested interests only care about property affordability when it suits them... There’s a whole range of things the Pollies could have done to cap house price rises over the years but there’s been nothing but tinkering around the edges. Genuine reform would be political suicide as the self interest groups would do all they can to maintain the status quo (as we are seeing with shorten’s proposal on dividends).

I agree with you that all super funds should pay tax, including in pension phase and we should also be reducing the company tax rate, as you say to compete globally. Imagine the hoo ha if a 15% tax was applied to pensions, the balance transfer cap was bad enough.

The reality is that this country has structural issues in its tax system. These are not sustainable and it is my generation that will pay the price. I guess you could say I am self interested as i don’t want to see the mistakes of today aimed to serve the most powerful voting bloc be paid for by myself and my children over coming generations.

Graeme Bennett
March 15, 2018

Hi Warren. I did read there would be a specific exemption for charities and not for profits. It would be good to see the policy set out in writing rather than dribbled out through the press but I presume Mr Shorten is looking to put out the bad news first and then feed in the offsets and exemptions. Otherwise Labor would release the modelling and the assumptions behind the projections.

March 15, 2018

Asking cash-strapped treasurers, current & potential, to keep off the conscripted tax haven of super is likely to be as successful as petitioning hyenas to stay away from forest-kill: easy prey, and it appeals to base human envy against the 'better off'.
Like every other half-thought revenue measure (the unlamented super-surcharge that was not a 'tax', super contribution restrictions, the old RBL system, TBAR and the sequel of events-based reporting etc): if reform fatigue does not kill it, implementation will, with ATO being the unwitting meat-in-the sandwich.
Somethings will not change, though:
Gaming the system will continue as fair game.
Large funds able to set off other taxes to absorb excess credits will struggle with the inevitable inequity, ultimately exposing trustees to class actions. Why should retirees blatantly subsidise accumulators?
SMSFs would find younger members tosoak up credits that would be wasted.
Traffficking in credits through 'clever' schems will be engineered, tested and some struck down. But with self-assessment, some may chance it. Hello, operation daughter of Wickenby!
Corporate finance might find a way to stream franking credits to those who can use them, by splitting shares etc into frankables and unfrankables: disruption meets CFO.
Curiously, if the government can ignore credits forming part of taxable income in refunds, what is the ethical basis for objecting to some not declaring it (or other income)? Tax compliance is not mere form-filling but a mindset. A future Lord Dennison might discover an implicit duty of 'not fomenting tax avoidance' in future governments through hare-brained schemes.

Tony Reardon
March 15, 2018

It is difficult to see any logic in the aversion to tax refunds under this particular circumstance as tax refunds of excess tax paid happen all the time, probably to virtually every PAYG tax payer in Australia. The large refunds being bandied about as justification could have only ever applied in very few circumstances and the restriction this year to $1.6m for pension accounts make these a thing of the past.
The principle that tax paid is netted off against tax due and the difference is paid/refunded is well established and obviously fair. Imputation credits, which are simply the tax already paid on a dividend distribution, should not be treated any differently.
The tax treatment of up to $1.6m of superannuation in pension mode is favourable at zero tax payable on income earned. This means that, under this new scheme, the imputation credit is valueless, essentially taxing the dividends at the company tax rate. If the fund in pension mode is invested in a balanced asset mix (about 50% Australian shares), this new treatment is equivalent to the 15% tax on overall earnings and completely negates the concession.
The value of a $70 dividend is $100 to an entity with sufficient other taxable income, but only $70 to a fund in pension mode - this seems to break every principle of equity. The practical effect is to make franked dividends far less attractive to one class of investor versus another and introduces unnecessary bias. The SMSF might be forced to a strategy of selling investments prior to dividends to allow others to take advantage of the difference, given that any capital gain is still subject to zero tax. It is also foreseeable that financial institutions could create products that take advantage of this arbitrage to provide some benefits. In any event, one should assume that changing tax in such a manner will force behavioural changes and the anticipated revenue is unlikely to eventuate given that there are still many ways for the full value of the imputation credits to be used. While this will costs SMSFs money and will reduce their returns, it seems probable that this will result in very little additional tax retained for whatever schemes the Labor party thinks it will fund.
If a fund has a mixture of accounts in accumulation mode and pension mode with many more in accumulation, the imputation credits can be applied across the whole fund. This leads to a different tax treatment to a pensioner with funds in an SMSF (with no accumulation accounts) as against a pensioner with identical investments in a large retail or industry fund with many other members with accumulation accounts – this is completely unfair. One has to be suspicious that advantaging these funds is the intention of the Labor party given their union links and the union involvement in these funds.
The underlying problem is the overly complex Australian tax system with interactions that result in possibly unexpected outcomes. Dividend imputation is a typical instance with complexity rather than simplification at the heart of the system. A company has two possible sources of funds – debt and equity. It must pay interest on debt and must repay it; it has the option to pay dividends to equity holders and never repays it. However, the payments to the different investors are treated differently as interest is deducted as a business expense by the company and attracts full taxation in the individual investor's hands, whereas we have the complex imputation scheme for dividends.
The simple, fair solution is to allow distributions to equity holders as a deductible expense to the company as if they were interest and tax these fully as part of the recipient's income. This levels the playing field for international and domestic investors, removes the bias within a company for one form of capital over another and is far less complex to understand and to administer. Given that both companies and individuals pay tax on a PAYG basis this should not impact tax timings. This would also have the effect of a substantial drop in the notional tax rates of companies and would make Australia a far more attractive destination for overseas investments.

March 15, 2018

As one of Labor’s SMSF “millionaires” with asset test just keeping me from a govt pension and income of $50,000 my income will be reduced to $35,000. Looks like I end up drawing on capital for two years and qualify for govt pension. Thus saving the govt money? I don’t think so.
How long until the Fund Managers start new products to get around this change.

March 15, 2018


Sounds like a plan..Sell all your equities before the market sells off (due to a reduction in franking credits), book an around-the-world cruise on the Queen Mary, come back and go on the pension.
No more financial advisors, no dividend surprises, tax administration or waiting to hear if the Dow Jones has sold-off overnight.

March 15, 2018

Warren, your thinking is spot on. Keating's policy was good but Howard/Costello improved it and made it fair to those under the 30% tax rate so they could fully benefit from the company tax already paid, as per everyone else.

Warren Bird
March 16, 2018

Yes. And understanding it this way changes the discussion about the company tax rate. What it means is that the company tax rate is already zero. Domestic shareholders pay tax on the earnings that they get 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%.

If the company tax rate was zero and the government charged 30% withholding tax on all dividend payments to non-residents we'd be in exactly the same position as we are now.

So the only economic question to be asked in relation to company tax is what the appropriate rate of withholding tax should be for foreign shareholders. This is where global tax competitiveness in the market for capital comes into play.

If we think we need to be about the average of rates of company tax overseas then we will use that as the benchmark. If we think that foreigners should pay a similar rate of tax to the average domestic tax payer then we'll use that as the rate (and that's about 25-30% I think - haven't checked in a while).

It just requires recognising that the individual is always the ultimate payer of any tax and where the incidence of tax lies.

Warren Bird
March 15, 2018

As I've said in a comment on another post on this topic, charities will also be affected by this. Those that have bequests, etc invested in shares will lose their franking credits. This will reduce the amount of operational expenses that their investments can cover and thus reduce the amount of donations that go directly to the field of charitable work.

Those arguing against Mr Shorten might like to give some thought to including this sector in their arguments, so that they don't sound quite as self-serving.

March 15, 2018

ALP has said that charities will be excluded.

Warren Bird
March 15, 2018

That's good, but it highlights the fundamental flaw in the proposal.

I've thought more about this during today and discussed it with some friends.
Let's go back to the principle behind imputation. It is to ensure that income is taxed once by those who are obligated to pay it. The ALP's proposal abrogates this important principal. It is a matter of equity and fairness in the way different individuals are treated.

If people who have a zero tax obligation don't get franking credit refunds then they have paid tax on income when they shouldn't have had to.

Compare person A who is semi-retired and does a bit of work that earns them $17,500 a year, just under the income tax threshold. They don't have to pay any tax.

Person B is semi-retired, but runs a business - say ironing - that brings in a net of $17,500 a year. They also don't have any 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 they pay 30% company tax and pay the rest as dividends. Person C gets paid a dividend of $12,250. They have effectively paid $5,250 in tax on their income just because of the veil that the company structure has created. The full $17,500 earned by the company should be theirs, just the same as the ironing lady's business income or the part-time worker's income. Under the current imputation system, Person C gets to claim that tax back and gets a payment of $5,250 from the tax office.

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

Paul Keating's original imputation system had this flaw in it. John Howard and Peter Costello fixed it, so that Person C could get that $5,250 back. Keating did absolutely the right thing to move our tax system in the direction that he did.We ended up with a much better tax system. Howard and Costello enhanced it by removing the gap that was left in the original construction of the system.

People who have a zero tax obligation shouldn't be forced to pay tax. This is a matter of treating the people of Australia equitably and not discriminating against those who happen to earn their income through shareholdings.

If charities are exempt, then that seems to recognise the very point I'm making. Why stop there? All people who have a zero tax rate should be treated the same.

If the ALP or anyone else believes that there are people who should be paying tax when they are currently on a zero tax rate, then it would be better that they address the root cause of the problem rather than mucking up one of the better tax reforms that a government has ever introduced.

Jan H
July 06, 2018

Labor will exempt charities and unions.

March 15, 2018

Great article - thanks. I hope that one push back against this policy is sensible commentators highlighting that the revenue predictions of $59 billion are illusory. However they may have added up the refund cheques, it would assume that those with all of their investments in shares will not alter the investment structure to ensure that excess credits will be absorbed by other taxes on other income. It is a bit like assuming if a truck is bearing down you, you will not move out of the way.

The Labor policy is seriously flawed. At the heart of corporate tax policy is the proposition that company tax profits will be taxed at the shareholders' tax rates. (Same playing field as employment earnings interest and trust distributions which unlike dividends are not pre taxed.) This policy distorts a very simple legislative design principle. The most likely affected class will be the low income earner trying to maximise household income by having shares instead of term deposits. Table 1 highlights the serious mischief in the Labor policy for this low income earner.

One would have thought if there was a sensible economic reason underlying Labor's policy it is to remove risk from SMSFs in particular by encouraging a more balanced portfolio. That then interferes in the rational decision making of investors to decide how to allocate risk in their investment decisions. But, I think if they just want a new revenue source they will find themselves holding their pocket linings out, after funds rebalance portfolios to ensure otherwise excess credits are not wasted.

This bad policy making, yet optimises the politics of popularism.

March 15, 2018

They have added up the refund cheques from 2014/15. These figures can never be repeated as any balance over $1.6m gets taxed at 15% rather than nil. So even the estimated budget benefit is incorrectly calculated. And as an adviser, we will restructure our retired assets away from the fully franked dividend paying companies and thus there will be even lesser potential budget savings, this is poorly thought out in the extreme and on surface seems like a very cynical class division tactic.

Chris Eastaway
March 15, 2018

Details on this proposed policy may emerge as time goes on and like Gen Y I agree that the policy may well benefit the greater good. However, on face value it appears to me that an unintended consequence for low income earners is that Labor will create a class of income that’s assessable but not refundable up to the limits of the tax free threshold.

For example, if I currently earn $18,200 per year from franked dividends then my assessable income and my net income are both $18,200 (as is the case with my wife, whose current income consists of only franked dividends while we raise young children). The loss of imputation credit refunds would drop this income to $12,740 net, while still being assessable for all other purposes at $18,200 (think pensions, family tax benefits etc). If this income were to be earned in any other way my understanding (albeit, as a non professional) is that any tax paid would be refunded up to the limit of the individuals assessable income as long as that income were below the tax free threshold. (Perhaps I should interchange the word “assessable” to “gross”, but as there’s no deductions to consider in this example I believe they’re one and the same?)

It’s a self centred perspective on a broader issue, I know, but I’m sure I’m not alone in the view that if Labor wants to harness some revenue from currently tax exempt Super accounts, they should do just that! This policy seems a very Blunt tool.

Could someone please tell me I’m wrong (and show me why!)

Graeme Bennett
March 15, 2018

I don't think the numbers are quite right. If you receive $18,200 in franked dividends you will be taxed on $18,200 plus $6,800 franking credits. That would take you above the tax-free threshold and some tax would be payable before allowing for the offset for the imputation credits. There would be excess franking credits that would not be refundable. If you were instead referring to dividends that gross up to $18,200 you may well be correct.

I agree the policy would have a very uneven impact. If people had personal income of say $200,000 comprised entirely of franked dividends I expect they could fully utilise the franking credits and pay the same amount of tax that they are paying now. Those investing in their own name with much smaller incomes would be knocked around by the change. They are unlikely to be fully compensated by Labor though there may be some token offset when the full details of the plan are finally released.

Chris Eastaway
March 15, 2018

Thank you Graeme, and yes, I should have written "For example, if I currently earn $18,200 per year from fully franked dividends (grossed up)" - I was talking from the view of the tax office that grossed dividends form an individuals assesable income.

Nicholas Stotz
March 15, 2018

Hi Chris,

Your numbers are correct if we assume that the investor received a $12,740 dividend and $5460 of franking credits. Any investor who has surplus franking credits after reducing their taxable income to zero would be negatively affected by this policy. This would include your wife seeing as she has no other income to offset against using her franking credits.

Your point about benefits being lost is an intriguing one and I wish I could give you a definitive answer however I am not familiar with the intricacies of means testing. I would imagine that the means testing would be based on after tax income, so although you are receiving $18,200 before tax, your benefits would be determined by your after tax income of $12,740.

Perhaps a compromise Labor could make would be to remove the refund policy but allow investors to carry their credits forward to future financial years. This would mean that younger investors such as your wife would be in essence giving an interest free loan to the government until she earns a taxable income and can cash in on her franking credits.

Many thanks for your input and I hope I've answered your question.


Chris Eastaway
March 15, 2018

(In reply to Nic, sorry, there's no reply button)

Thanks Nic,

I agree there’s an intriguing issue surrounding benefits here.

You state “I would imagine that the means testing would be based on after-tax income, so although you are receiving $18,200 before tax, your benefits would be determined by your after tax income of $12,740.”

This illustrates the paradox as I see it. Franking credits are not a deduction, so in the absence of other deductions you can‘t have an “after tax” income that differs from your gross income if it started off at or below the tax free threshold. Your gross income and after tax income need to be the same.

So in light of the previously mentioned income of $18,200 it seems that tax has been paid, tax is not deemed payable, tax can’t be refunded, and isn’t able to discount gross income in regards to benefits. Labor have a problem with their policy.

I’m not the welfare police. I just find this to be an interesting problem with the proposal that will affect (more than likely) Labor’s base.

March 16, 2018

Agree Chris. If you listen closely to the words of Chris Bowen, its all about SMSFs. If you listen to the words of Shorten, its all about hitting the wealthy and trying to protect the working and middle class. Pity they don't understand that there was a whole generation of middle class Australians who retired and took their lumps sums out of the super system prior to the introduction of tax-free pensions in 2007. All of these people are going to be punished for the flagrant practices of those SMSF trustees who decided not only to operate in a tax haven but claim refundable credits.from the ATO. The SMSF industry must shoulder responsibility for the ALPs actions. If the ALP had simply called it a SMSF tax then they would have won universal support.

March 16, 2018

What a ridiculous statement.
SMSFs operate under exactly the same tax system/treatment as APRA funds. If people wish to move funds from within super to outside super that is a personal choice and has nothing to do with the various structures.

Gen Y
March 15, 2018

There's no doubt in my mind this policy change is for the greater good. The vested interest groups (ie the Wealth Management industry) will cry poor but the 0% tax on pension income and drawings introduced as part of the final splurge by the Howard administration are simply sucking too much taxation revenue out of the system.

Secondly the high dividend payout rations encouraged by the generous imputation credit regime are also putting a handbrake on company investment in this country. Reducing the incentives for paying out 70% of profits of dividends will see this income re-invested, creating jobs and economic growth.

The risk to property prices is a real one, but that horse bolted 20 years ago. Why the current concern about rising property prices when everyone has turned a blind eye for so long.

Graham Hand
March 15, 2018

Thanks, Gen Y, but see also Graham Horrocks' article on why companies should pay dividends to super and pension funds and then justify the need to raise capital in other ways.

Graeme Bennett
March 15, 2018

Hi Gen Y. The impact will be much wider. Larger pension-paying SMSFs would take the biggest hit but you'd be surprised how many elderly people have shareholdings even as pensioners. IAG, Telstra, AMP, CBA regularly turn up in probates. Presuming they claim the refunds they might well feel the pain more. Self-funded retirees end up being cannon fodder yet again.

I agree with Graham Horrocks on payout ratios. I'd much rather companies be selective with their investing rather than invest because they can't distribute the cash. BHP's former progressive dividend policy was a good example of what can happen. At the top of the market they generated a lot of cash and were forced to hunt around for projects. They paid big prices and have since had a series of huge writedowns. Conversely when the market fell heavily they had little in the kitty to take up opportunities on offer. For mine it is much better for companies to pay out what they don't have an immediate use for and then go to the market to raise money for new projects that come along. That way the market can decide if it thinks the new business is commercial and price the offering accordingly.

March 15, 2018

"vested interest groups"
Interestingly, pooled super funds (like the union run Industry Super funds funnily enough) will be largely unaffected because they use all of their franking credits one way or the other.
Make no mistake, this is targeted directly at SMSFs, however low income pensioners holding shares have also been caught up.
Unintended consequence or just lost in the spin?

March 15, 2018

Yes it is designed to kill SMSF's but I plan to reduce my holdings and then sell cum and buy ex to convert all the franking credits to capital.
Or switch to a large fund where they use franking credits to offset contribution tax.

Kevin coldrey
March 18, 2018

I doubt that many companies' dividend policies are much influenced by dividend imputation.

Frank Gomez
March 15, 2018

A big flaw in Labor's argument is that they have focused on SMSF's which already are over-represented in the wealthier segment of the market. However excess franking credits are available to many retirees who have no SMSF or even any super.

Any Centrelink aged pensioner who holds a few Australian shares is likely to receive franked dividends with credits in excess of their tax liability which is often NIL due to offsets.

If Labor modelled the number of non-SMSF retirees who own shares and gain value from the refund of excess imputation credits the picture would look very different.


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