Last March, the Labor Party announced its highly controversial plan to axe cash refunds for excess franking credits from 1 July 2019, if elected. Following initial backlash, Labor then made an exclusion for charities, not-for-profit institutions (including universities) as well as those on the Age Pension.
How do franking credits work?
Franking credits were introduced as a means to prevent double taxation (i.e. when a company’s profits are taxed and the shareholder’s distribution of those profits are taxed again). The Australian Taxation Office (ATO) uses franking credits to account for company tax that has already been paid on profits that are subsequently distributed to shareholders. Those shareholders receive a credit for the tax that the company has already paid on those profits effectively recognising the tax that has already been paid in relation to the income received by each shareholder.
In circumstances where the shareholder’s marginal tax rate is higher than the company tax rate (currently 30%) these franking credits effectively reduce the ultimate tax bill payable by the shareholder as they are offset against their final ATO tax assessment. However, in circumstances where the shareholder’s marginal tax rate is less that the company tax rate (currently 30%) and the total franking credits attached to their franked dividends exceeds their basic income tax liability for the year, the ATO currently refunds the shareholder the difference.
If Labor is elected and their proposal becomes law, franked dividends will continue to have a franking credit attached to them however refunds for excess franking credits by the ATO will be scrapped!
What can investors do?
These are, of course proposed changes only at this point, and are subject to an upcoming federal election and the usual political process, so there is still a lot of water to flow under this particular bridge and there is no need for investors to overhaul their investments just yet. In saying that, it would be wise to stay on top of the developments in this space as, if the proposal is passed, investors may need to seriously reconsider their investment strategies.
We will keep an eye on this, particularly over the coming weeks and months with the upcoming election, and will communicate any key updates via our website and so we encourage you to watch this space.
In the meantime, if you have any questions or concerns over Labor’s proposal and what this could mean for your strategic investment planning, or would like to discuss your investment strategies more broadly, we encourage you to get in touch.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.