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Report by franking credit inquiry released

Report on the inquiry into the implications of removing refundable franking credits

In September 2018, the Treasurer, Josh Frydenberg, asked the House of Representatives Standing Committee on Economics to inquire into the implications of Labor's proposal to remove refundable franking credits.

The Report was released last week.

From the start, the Committee's work was controversial, and this is reflected in the strongly-worded Dissenting Report from the Labor members of the Committee (at the end of the full report). I already wrote an editorial on the ways the Government led by Tim Wilson used the parliamentary committee process to agitate against the policy. At one stage, the Committee required people attending the public hearings to register for a petition against the so-called 'retirement tax'. The Committee received 1,777 submissions, plus 1,108 'form letters', essentially as provided by Mr Wilson.

The Committee became a forum for hundreds of people to vent their anger at the loss of their franking credit refunds, usually retirees who were not wealthy and had planned for a self-funded retirement with the benefits of a full refund. For example, the Report records:

"Many affected retirees spoke of anxiety from the fear of losing a third of their income. There’s Karen’s story of ‘exhausting and soul destroying’ stress.

Others raised concern that abolishing refundable franking credits would compound the legacy of the gender pay gap. There’s Margaret’s story of historic sexism and how ‘too many people making decisions for us’ are ‘totally unaware of history and our lives’.

And then there are straight stories of financial hardship. There’s Michael’s story of medical challenges and how the removal of refundable franking credits will cause him ‘considerable hardship’."

Notwithstanding the genuine complaints that people had planned for their retirement legally under a prevailing set of rules, the Committee should be seen within a political context, especially in the month before a Federal Election.

There are only two recommendations: 1) not to remove refundable franking credits, and 2) any policy should be part of an equitable package of tax reform.

Highlights of the Report

Tim Wilson's summary rightly points out that wealthy people with large SMSFs are less likely to be affected by the loss of refunds.

"It also does not take account of the introduction of the transfer balance cap in the 2017/18 financial year that applied a 15 per cent tax rate on income earned on balances above $1.6 million. These funds will continue to enjoy the use of franking credits to fully offset their tax liability, while those under $1.6 million will not."

The Report highlights the impact on some lower income earners who currently receive a refund.

"Abolition of refundable franking credits is fundamentally regressive. Australia has a tax free threshold of $18,200 for workers, yet the abolition of refundable franking credits would apply an effective 30 per cent tax from the first dollar earned."

There is also a problem with the data, as the Report uses 2014/15 numbers which do not reflect the introduction of the $1.6 million transfer balance cap on 1 July 2017. There is far less in the pension phase of super than the Report suggests. Nevertheless, the Report quotes the Alliance for a Fairer Tax System data which stated that in 2014-15, over half of those receiving cash refunds had incomes below $18,201, and 96% had taxable incomes of less than $87,000.

Much of the Report quotes individuals who will be adversely affected, and financial services groups defending their members.

The revenue implications are huge. The independent Parliamentary Budget Office (PBO) estimates the policy will collect $5.2 billion in 2020-21 and $48.6 billion by 2027-28.

For the record, in its conclusion, the Committee:

" .. is of the view the policy is inequitable, deeply flawed and the timeline is rushed ... the ALP’s policy will unfairly hit people of modest incomes who have already retired, and who are unlikely to be able to return to the workforce to make up for the income they will lose."

The Dissenting Report

The three Labor members of the Committee produced a long Dissenting Report, with their main argument being the inequitable nature of franking refunds. Their comments particularly target SMSFs:

"This analysis from the PBO shows that 92% of taxpayers in Australia did not receive any cash refunds for excess imputation credits in 2014-15. 90% of all cash refunds to superannuation funds accrued to SMSFs (just 10% went to APRA regulated funds). Labor understands that this is despite SMSFs accounting for less than 10% of all superannuation members in Australia.

The PBO analysis indicates that of all excess imputation credits refunded to SMSFs in 2014-15, 50% of the total benefits accrued to the wealthiest 10% of SMSFs by fund balances (which had balances in excess of $2.4 million). The top 1% of SMSFs by fund balance received a cash refund of $83,000 (on average). Labor's analysis shows that this is an amount greater than the average full time salary."

Where does that leave us, other than with two sets of political statements?

Shadow Treasurer Chris Bowen shows every sign of toughing it out with the policy and taking it to the next election and beyond, but if Labor wins the Lower House, it is unlikely to control the Senate. Bowen will argue he has a mandate but he will probably need to relax parts of the policy to gain the numbers to pass the required legislation. Changes such as allowing the first $5,000 of excess refunds would still allow him to claim he has targetted the wealthy.

Footnote on the election campaign

Scott Morrison kicked off the Governments campaign by quoting a $387 billion number for for 10 years of higher taxes under Labor. This is the break up:

  • $230 billion in personal income tax by not adopting the Coalition's new tax thresholds in 2022 and 2024.
  • $57 billion in stopping refunds for excess franking credits.
  • $34 billion for reducing the threshold to $200,000 for the superannuation surcharge and lowering the non-concessional contributions cap to $75,000.
  • $31 billion to stop new negative gearing arrangements for existing dwellings, plus reducing capital gains tax concessions from 50% to 25% from 1 January 2020.
  • $27 billion for taxing trusts
  • $6 billion for the 2% deficit levy on high income earners
  • $2 billion from capping fees at $3,000 for managing tax affairs.


Graham Hand is Managing Editor of Cuffelinks.


Peter McDonald
May 06, 2019

There's a glaring inequity in Labor's policy on abolishing franking credits that does not seem to have received any publicity. With reasonable assumptions on the level of fully franked shares held in a self funded retiree's pension fund, the abolition of cash refunds will in effect result in that retiree paying significantly more tax on their income than a working taxpayer, including the medicare levy. Their tax is of course prepaid by the companies in which they hold shares, in much the same way that tax is collected for the ATO by an employer.
Why has this issue not been highlighted because the calculations involved are fairly simple. Moreover, this analytical approach to discover the inequity of the policy speaks much more loudly than emotive and illogical justifications such as by Chris Bowen stating that no other country in the world provides cash refunds. Whilst there is some merit in the principle of taxing excessive superannuation amounts (by the way, this happens now anyway since the introduction of pension caps), Labor's policy is badly thought out and will result in many retirees effectively paying significantly more tax than an ordinary PAYG taxpayer receiving the same net income. This is punitive and in no way passes the fairness test.

April 16, 2019

Perhaps some of the dissenters should think a little more?
What if a wage earner worked a great number of overtime shifts. Reasonably this person could have a situation where the tax they paid is more than their income requires - should this person have the excess tax repaid?
Now consider a tax payer who owns shares as well as a working income. The combined tax in this situation is also more than the combined income requires - should this person have the excess tax repaid?
I am a SMSF retiree over 60 and by law, which Liberal and Labor passed - not by me, I pay no tax but I have income from dividends and franking credits linked to these dividends. In our second example the combined tax and combined income was used to set the tax obligation. Is it fair for me who has no tax obligation, to be taxed at 30% from the first dollar (no tax free thresholds) and have no right to claim deductions.
I don't mind paying some level of tax but 15% is what all superannuation funds pay and what those with >$1,6M will pay on their excess dividends - should I have to pay 30% when retirees with higher balances pay less?

April 16, 2019

I wouldn't mind people dissenting if they mounted an argument for their case, and demonstrated they understood what franking credits actually were and how they worked - then we could have a discussion. But fly-buy one liners aren't really adding much to the conversation.

Carmel Hards
April 14, 2019

A refund for something that isn’t paid for is a total ripoff.

April 15, 2019

Which is why there are franking credits to ensure that only over paid tax is refunded.

Warren Bird
April 15, 2019

Carmel, the tax has been paid. That’s the very principle of imputation. For all taxpayers who own shares, the company tax paid is imputed as tax paid by them. The same as if they own their own business.

Even the ALP has had to acknowledge this. Refunds will still be paid to many zero tax payers, such as charities and pensioners. The new proposed policy is NOT based on your argument, but on a view that some who get refunds shouldn’t. The better way to deal with that, as I’ve said till I’m blue in the face, is to increase their tax rate. It’s just rubbish policy making to do what they’re planning.

April 15, 2019

Imputation's purpose is to ensure income is taxed at the person / entities legislated tax rate.

Taxing income once at legislated rates then taxing 'excess' franking credits at 100%, by not refunding them, is double taxation.

Bill Watson
April 12, 2019

The section of the community that understands the dividend imputation system resents labor's position for the following reasons:
1. Labor's justification for its position is based on out of date information (viz, the situation that existed before the transfer balance cap was introduced).

2. Labor refuses to accept that the refund of franking credits was introduced with the FULL SUPPORT of labor. It was not some scheme introduced just by John Howard.

3. Labor insists on referring to the current system as a "rort" or a "concession" when it is nothing of the sort. It is simply the refund of tax that HAS been overpaid (by the company on behalf of the shareholder).

4. The blatant unfairness of labor's position is indefensible since refunds are retained for some (eg, unions, some pensioners, charities), and not for others.

5. Labor is intending to change the rules after retirees have entered the scheme in good faith and under a given set of rules.

Labor has dug itself into a hole, and while refusing to acknowledge the above issues, continues to dig.

April 12, 2019

Ideas within brackets are quotes from the economics committee or Chris Bowen's response to me.
(Labor has taken a principled and responsible approach to tax reform – targeting unaffordable and unfair loopholes and concessions in the system to ensure that the Budget is able to provide important services like schools and Medicare.)
Chris Bowen indicated that his proposal was to (target the rich) and (spread the burden of budget repair across the community), neither of which his proposal will do, especially when the pension fund balances for retirees can no longer be above $1.6M as it could be in 2014 - 2015! Is it principled to to use 'skewed data'?
(the Howard Government changed the dividend imputation laws to allow individuals and superannuation funds to claim cash refunds for any excess imputation credits that were not used to offset tax liabilities. That is, when an imputation credit was greater than their tax liability, they received a cheque at tax time. The purpose of dividend imputation was to reduce tax paid, and now individuals – many wealthy individuals – were getting a cash bonus.)
This identifies that Chris Bowen is imposing a TAX on SMSF pension phase retirees but (no-one will pay more tax) - a definite lie in my opinion. Isn't this against current law?
(Distributional analysis from the PBO shows that for the 2014-15 year:
• 90% of all cash refunds to superannuation funds accrued to SMSFs just 10% go to APRA regulated funds despite SMSFs accounting for less than 10% of all superannuation members in Australia;)
This is supported by the 2014 – 2015 data but what is the case for current funds, no data is presented!
(• Of all excess imputation credits refunded to SMSFs, 50% of the total benefits go to the wealthiest 10% SMSF) this data is for FUND balances not individuals balances (which have balances in excess of $2.4 million); no individual can have this balance now but there is no data for the number of members in the fund - large numbers of members with small balances could reach these amounts and the franking credits per member would also be equally small!
(• The top 1% of SMSFs received a cash refund of $83,000 – an amount greater than the average full-time salary;)
It is the same with the top percentile how many investors are sharing the average amount, $83,000 of franking credit? A 5% return on investment becomes a 7.143% return with franking credits to get $83,000 franking credits the income would be($83,000 x7/3 = $193,666 and the investment required with 5% would need a total of $193,666 ÷ 0.05 = $3,873,333, with a maximum balance of $1.6M multiple investors must be involved but how many? For a 4% return $193,666 ÷ 0.04 = $4,841,666 so much higher balances could be required to return this amount! At least 3 members would be required - $83,000 ÷ 3 = $27,670 or 4 members $20,750 of excess franking credits - not so excessive now I think!
(• Some SMSF funds received cash refunds of up to $2.5million)
This information is for a SMSF fund not an individual, again there is no way of knowing the number of members. All that can be said to get more than $2.5M in franking credits the investment required would be 30 times the values shown above $116M to $145M, there would definitely be a large number of members, some of whom could have large individual balances and others with smaller balances, maybe even a single pensioner, so all of this tax repair money would be LOST to Labor – nothing is sure!
HOW can anything of substance be determined using this information from the past, when balances in pension phase retirees could be >$1.6M and try to link it to the present, when no retiree in pension phase can have a balance above this amount?
Principled and responsible or just plain dumb and deceitful but definitely NOT looking after the poorer people in the community?
To target the rich the only proposal you need is to enact a law, which limits a retiree in pension phase to have only that superannuation fund, all others must be put into financial accounts of your choice so you can control the tax obligation. The retiree should have the right to transfer money into the pension fund if required to maintain the $1.6M. The dividend return at 4% on $1.6M would be $64,000 plus $27,430 or $91,430, Then these people would also have access the income from their other accounts.
No doubt this would lead to a comfortable existence and possible allow the poorer retirees to keep their franking credits. This could be determined at a later date.

April 12, 2019

"Labor has taken a principled and responsible approach to tax reform":

'Reform' requires it to be an improvement - not a regression.

Don Macca
April 12, 2019

In their dissenting report Labor said.
"This inquiry has been more in the nature of a political campaign" Yes that is correct for both major parties.
The one thing which is obvious is that most of the data quoted relates to the 2015/16 tax year. The full effect of the 15% tax on accounts over $1.6m is not fully known.
To try & decide these issues with the pressure of a federal election; just transforms it (as Graham says )into " two sets of political statements?"
No let's get up to date information. Then have a debate without politics. The ramifications are much wider than some SMSF's losing franking credits.

April 11, 2019

I notice the two dissenters don't appear to know the difference between taxable income and tax payable(or refundable).

April 11, 2019

This - plus the threat to negative gearing and the CGT increase will lose them the election. Shorten's demise will mirror Hewson's - with the policies not tried again.

April 11, 2019

Well, the ALP comments are a start of the spin. So let's look at what the PBO numbers actually show.

Yes 91.9% of individual taxpayers do not utilise excess franking credits.

But 91.51% of those who do use them have a taxable income below $43,200. That taxable income will include the franking credits.

The average excess franking credit for those 91.51% is just $1,360.22.

It has been said that excess franking credits are claimed by people who do not pay tax. That is incorrect. Some people may pay tax [through PAYG] and still get a refund due to excess franking credits. The PBO numbers show individuals with incomes that mean they do pay tax.

The suggestion has also been made that 80% of the benefits go to 20% of those using it [ie pareto principle] - again wrong.

The individual table shows 80% of the benefits go to 95% of the individuals. The SMSF table suggests that 16% receive 52% of the benefits - well short of 20: 80.

The SMSF table shows that 90% of funds are smaller in size than $2.4M. On the assumption of a 2 person fund that amounts to a maximum of $1.2M for the wealthiest in the 90% of funds. An amount that can be
easily surpassed by the young if they got jobs today and contributed the required amount into super over a 40 year working life.

I will point out that 70% of SMSFs would have a little over $500,000 per fund member - well below the $1.6M both political parties think is the size of an appropriate pension account.

The excess franking credit policy change is not an attack on the rich - it is an attack on everyday people.

April 11, 2019

Franking Credit is treated as "Other Income"for Tax .After tax and Medicare levy are taken any surplus tax is returned.
SMSF is tax exempt by legislation so the Surplus Tax is returned.
The issue is the that instead of calling Other or total Div INCOME it is wrongly referred as Franking CREDIT and majority thinks it is a free CREDIT given away for some 19 years ?

April 11, 2019

The committee actually received more than the stated 1777 submissions. The 1777 was the number that they published. There were other submissions which they did not have time to put on the website.

They sent out an email to those affected to say there were too many to publish in the time available. I sent in two that were never put on the webpage.

The argument that 92% of taxpayers don't receive credits is totally irrelevant. Suppose a policy was put forward that everyone with a birthday in September paid twice the normal rate of tax. That would not affect 92% of taxpayers, but that would not make it right. Or what about 92% of Australians don't receive the age pension so let's abolish that.

The argument that 90% of cash refunds went to SMSF's is also irrelevant. Of course this is the case as most retail and industry funds can absorb them. And of course SMSF's are only 10% of super fund members - unless you have a decent balance you will not have a SMSF.

If most of the franking refunds are going to the top 10% of funds, then surely we should be targeting these people to pay more tax - we have already done this to some degree - rather than punishing the small income retirees to get at the high income ones.

In my last submission to the enquiry (which they did not publish) I suggested some ways the whole retirement system could be made more fair. I am including here the graph I did of how the pension and tax system currently disadvantages those who are above the pension assets test.

This chart is for a couple with their assets in a SMSF.
The blue is the age pension
The yellow (plus the green) is the investment income excluding franking
The pink is the franking credit
The hatched pink area is the franking that will be lost
The green area is the tax saved by having the money in super
The orange is actual tax paid on the balance above the cap

The main point here is the sump in total income above the asset cutoff which will be made far worse by the loss of the franking refund. We are also giving the highest balance retirees a tax benefit that is higher than the age pension.

The whole submission can be read at

April 11, 2019

"chart is for a couple with their assets in a SMSF": A clear graph.

My graphs for a senior receiving dividends (not fees or wages) from directly held shares :

April 11, 2019


Your charts are AWESOME

Well done

How did income tax ever get into this much of a mess.

And why can't we just go back to the drawing board and make tax simple. It wouldn't be at all difficult.

April 12, 2019

"make tax simple":

If a simple matter like 30% withholding tax on dividends ("dividend imputation") is so hard for Labor and the public to understand then:

Implement a 0% dividend withholding tax for resident TFNers - as per interest.

And Age Pension of all age qualified.

April 11, 2019

Take Bowen's own advice: Vote Labor last.


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