Tax Institute professor senior tax counsel Robert Deutsch explained that the denial of excess franking credits could be critical wherever a calculation of the tax, levy or benefit depends on a calculation of taxable income which includes a franked dividend.
Mr Deutsch gave an example of a single retiree named Anna, who has income consisting solely of a franked dividend of $20,000, franked at 30 per cent.
“Anna must include in her assessable income an amount of $28,571 (i.e. $20,000 + $20,000 x 3/7). As she has no deductions, her taxable income is also $28,571,” Mr Deutsch explained.
“The gross tax based on 2017/18 marginal rates is $1,970. Under Labor’s plan to deny excess franking credits, the $8,571 is offset against the gross tax of $1,970 such that the net tax payable is reduced to zero, with an excess of $6,601. However, that excess of $6,601 now currently refundable will, under Labor’s plan, be no longer refundable.”
While that aspect of the proposed policy and its impact is reasonably well understood, what has not been is that, even though the $6,601 will no longer be refunded under the Labor plan, the Medicare levy will continue to be calculated on the full taxable income of $28,571 rather than the lesser amount of $21,970 (being $28,571 minus $6,601), he explained.
“The Medicare levy would then be 2 per cent of $28,571 or $570 as opposed to a Medicare levy of $0 if based on taxable income of $21,970. That is because the Medicare levy for a single person not receiving the Senior Australian Pensioner Tax Offset (SAPTO) is 2 per cent of total taxable income if taxable income exceeds $27,476, but is NIL if taxable income is less than $21,980,” he said.
The $570 that has been charged is inappropriate, he said, as $6,601 has not been received either directly or by way of refund.
Other areas where all this might matter include the Private Health Insurance Rebate and the entitlement to the Commonwealth Seniors Health Card, he noted.
He assured SMSF professionals, however, that it would have no relevance to the age pension as shares are classed as financial assets and subject to a deeming rate irrespective of actual taxable income.
Very disturbing. Our life savings are invested as per current rules in our SMSF so we can make our own investment decisions. Am also concerned about Mr Bowen’s other policies and apparent bias. I am now a swinging voter.
One argument put up is that people have plenty of income via an account based pension, which is “not income” but they pay no tax. However little is said that the pension is reducing their CAPITAL in the same way as if they were living off another asset. If franking credit are lost every financial planner will have to do a SOA on all their clients to resist their future cash needs.
Also little is said that the very high SMSF balances now have all in excess of $1.6 million paying income tax at 15 per cent.
Just wondering. There appears to be a discrimination against SMSF Trustees in favour of Industry Fund trustees if the SMSF didn’t have a member in receipt of a pension before 28 March 2018. So the SMSF in this situation is denied franking credit refunds for their pensioners but an industry fund pensioner has no such detriment. Is there not an issue here with Australian Taxation Laws and even Discrimination Laws.
It is worth remembering that the inception date of franking credit refunds was 01July2000 – the same as the GST. At the time it had bilateral support because it was the only form of compensation available for self funded retirees for the GST. Also, the ATO label franking credits as tax withheld. Just fill in an electronic tax return with some franked dividends and then go to the summary page. The credits will be there as tax withheld. So, a retiree over 60 can only be paying zero tax once the credits have been refunded – not before!
Peter Whitehead
Another consequence of Labor’s ill thought out plan on the back of an envelope. I wonder how many more will come to light?
This is nothing less that a Labor money grab from wherever they possibly can. This foolish plan takes away far too much disposable cash from those who would spend it on living, thereby helping the economy. With all the supposed tax savings that Labor plans to do, they are too blind to see that a large part of it will be paid out via Centrelink because retirees would no longer be able to live as self funded. It’s daft.
Correct me if I’m wrong but wouldn’t the medicare levy not be payable anyway? It will be offset by the excess franking credits that are not refundable.
Regardless, it is still an incredibly unfair policy. I, for one, will not be voting Labor.
Franking credits cannot offset medicare levy
You are correct in that you are wrong. Under the old pre refundable days, the franking credit was a tax offset or rebate that was applied against a person’s tax liability before the calculation of Medicare Levy.
Well there you go. This policy gets worse at every turn. Thank you for the clarification.
It is blatant theft. The Gross amount of Franked dividends is recorded as income. The company withholds the imputation credit and pays it to the Govt. Exactly the same as payg wages have tax withheld. The argument that the shareholder/pensioner does not pay any tax & therefore cannot get a refund of franking credits is absurd. The imputation credit is the tax on the gross dividend paid on behalf of the shareholder to the Govt. So the shareholder/pensioner is disallowed the refund of their tax paid just based on the premise they have not paid any PAYG tax during the year. If the pensioners income is below the threshold they are entitled to receive any tax they have paid (including tax on dividends) back.
If this moronic idea becomes policy the only way around it is to invest in companies that only pay unfranked dividends. At least then you will receive all your income. The other option is to lobby the business industry and get more companies to only pay unfranked dividends.
The state of this ridiculous tax system being run by clowns is laughable. No wonder we are now the stupid country.
i have been wondering when some commentary would take place on the age pension income issue.
Will the deeming rate be reduced to take into account the loss of real income by the labour Party proposal to deny refund of franking credits ? This has the potential to be a very messy situation as some pensioners may get the “benefit” of franking credits, and others may not!
I am strongly opposed to the Labour Party’s proposed changes to the tax treatment of franking credits and I and my wife will not be voting Labour at the up comming election. The current tax treatment of franking credits should not be changed ever. Labors tax policy is unfair, discriminatory, violates the principles of neutrality and horizontal equity and is regressive. It fails to tick all the right boxes, while the current tax treatment of franking credits ticks all the right boxes.
In Anna’s case and under current tax law she is required to pay $1970-00 in tax. Any other taxpayer whoes income does not include franking credits but whoes taxable income is the same as Anna’s will pay the same tax as Anna. Under current tax law Anna is taxed in the same way as all other taxpayers. That is she is taxed according to her marginal tax rate just like all other taxpayers regardles of the source of income be it wages income, bank interest income, rental income or any other type of income you can think of.
Under Labor’s unfair proposed changes to the tax treatment of franking credits Anna will be paying $8571-00 in tax which is the amount of her franking credit and the amount of money left in her pocket will be $20,000-00. Anna has been taxed at an average tax rate of 30%. However any othe tax payer whoes taxable income is the same as Anna’s but whoes taxable income does not include franking credits will only pay $1970-00 in tax which is an average tax rate of 6.89% and will be left with $26601-00 in their pocket. Anna is $6601-00 worse off than all other tax payers whoes taxable income is the same as hers but whoes taxable income does not include franking credits.
Labor’s unfair proposed changes to the tax treatment of franking credits will only impact on taxpayers whoes average tax rate falls between 0% and 30%. This tax rate captures all low income tax payers including tax payers whoes taxable income is below the tax free threshold. In fact the worst affected tax payers will be the ones whoes taxable income is below the tax free threshold. Tax payers whose average tax rate is greater than 30% which includes all high earning tax payers will not be affected by Labors unfair tax changes.
It is only fair that income rgardless of its source should be taxed once,in the hands of the owners of that income in the financial year in which that income is received and at the taxpayers marginal tax rate. Shareholders are the owners of a company. As owners of the company shareholders are the sole rightful owners of any company profits. It is the shareholders who are the owners of company profits and not the company. Therefore company profits should be taxed only once in the hands of the shareholders at their marginal tax rate and in the financial year in which the dividends are received and this is the current tax situation with franking credits. A company should only pay tax on undistributed profits. Consider a partnership with five partners. The partnership must lodge a tax return with the Australian tax office. If the partnership tax return shows a profit the partnership does not pay any tax. The partners must however include as taxable income their portion of the partnership profit on their individual tax return. The partners ar taxed once at their marginal tax rate in the financial year of distribution of the partnership profits. The only difference between shareholders and the partners is that shareholders liability is limited to the amount that they paid for their shares.
Well may you say God save the Queen for nothing will save the Australian economy from bankruptcy should the Labor party win tne next election. Me and my wife will do our bit to save the Australian economy by not voting for Labor.