‘High’ chance of franking credit reform this decade
The prospect of reforms to excess franking credit refunds will be “high” in the next decade despite it not going to happen under the current government, according to a tax expert.
In his address to the Tax Summit in Sydney yesterday, Tax Institute senior tax counsel Bob Deutsch predicted the likelihood of reform on a range of tax issues within the next 10 years.
Mr Deutsch remarked that Labor went about reforming excess franking credit refunds “in a very clumsy way” ahead of last year’s federal election.
He said that while it’s easy to talk of the benefit of hindsight, it was clearly a policy that led to a substantial erosion of Labor’s support base in some critical electorates.
However, Mr Deutsch said he thinks this will still be on the agenda event though it won’t happen under the current government, “because they’re too worried that they’ve campaigned so vigorously in the last election against any changes to this”.
“I think that there will be a change to this probably in the [electoral] cycle following it,” he said.
“It will be simply a matter of capping the amount of the refund at a certain level. Now that’s something that we can argue about, but if you capped it, for example, at $10,000, it will eliminate all those refunds for, to be quite frank, fabulously wealthy people such as Dick Smith, who has talked about this in the press.
“It would leave pensioners effectively unscathed and it would leave a lot of other people unscathed as well because they’d be entitled to the refunds up to that cap.”
Mr Deutsch said excess franking credit refunds are costing the federal government somewhere in the order of $5 billion a year, and the saving that they would make by capping it would be substantial.
“I think the prospects of this happening in the course of the next decade, and I emphasise I’m talking the next decade, not this political cycle, is high,” he said.
‘High’ chance of capital gains tax (CGT) discount reform
Mr Deutsch said he’s always argued that the current 50 per cent discount for individuals and trusts is too high relative to what is happening in the economy, relative to rates of inflation during the course of the last decade and is likely to be in the course of the next decade, although nobody has a crystal ball in that regard.
He said he endorsed Labor’s plan to halve the CGT discount and still thinks it’s the right policy.
“The distinction between earning income and capital gains in terms of how they are taxed, to me, is just too big a difference and it’s way too generous,” Mr Deutsch said.
“I think a halving of that CGT discount would be entirely appropriate, possibly with some additional mechanism to allow people who have held assets for more than the required period of time.
“It could be something in the order of six or seven years to have that higher rate of discount, but it seems to me that somebody has for three or four years in times of negligible inflation should not be entitled to a 50 per cent discount, but I’m sure many of you will disagree.
“I think the chances of anything happening in that regard in the next decade are reasonably high.”
‘Low’ chance of changes to discretionary trust distributions
On the other hand, Mr Deutsch believed the chances of reform to discretionary trust distribution are low.
Reflecting on Labor’s proposal to cap distributions at a 30 per cent minimum tax, he said this was something that was more difficult and less likely to succeed than any of the other tax reforms it put forward, and he thinks that still remains the case.
“I think we’ve tried to tinker with discretionary trusts for many years. There have been some reforms but certainly not anything in the way of simplification, certainly not in the way of minimising the impact on the economy of discretionary trust distributions being paid to lower taxpayers,” Mr Deutsch said.

Adrian Flores
Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.
You can email Adrian at adrian.flores@momentummedia.com.au.
- To give a bit of perspective, Pitt the Younger's 1798 Act treated joint-stock companies as partnerships, which virtually all legally were. Sir Robert Garran's 1915 Act allowed a deduction for dividends. The 1936 Act gave rebates to shareholders. This was suspended in World War II to raise revenue and free clerks from the laborious job of manual calculation to go and fight on the Kokoda Trail. The "suspension" went on 1985. Treasury wanted to keep the money - Its "solution" in 1985 was to tax trusts as companies! That would have driven a lot of businesses offshore or into simple partnerships. What most silly tax commentators do not understand is that you can actually have partnership tax treatment married to limited liability by other means. There was never any justification for double taxation of dividends. It was just a revenue expedient. The lack of long-term thinking is the main reason I resigned from the service of the Crown (with some sadness). Most politicians and bureaucrats simply don't care about long-term policy or principle, while much of public sentiment is simply driven by envy or greed.0
- How about doing the inequity differently and only allow $10k franking credits to be used. So a high income taxpayer using franking credits to reduce tax payable is also affected. And the big industry funds only use $10k. Much bigger savings for Government while retaining inequity for Labor and left wing commentators.1
- A thoughtful article, thank you. In view of all his protestations I wonder if Dick Smith gave back the reputed $500,000 franking credits refund he, or his SMSF, received.0
- No he didn't. Made some theatrical comments about the ATO not being to accept his offer but any real effort to get rid of his ill gotten refund like donating to a charity did not materialise. Imagine my shock.0
- Hello, Labor's dividend imputation credit policy is not only clumsy, it is discriminatory. Call it out for hat it was! Don't think they have changed it either.1
- Exactly, tilting the playing field in favor of large super funds at the expense of SMSF's and low income individuals. A cap will be slightly less clumsy but won't change much in the fairness unless it is applied to members of large funds as well.2
- Appalling lack of logic. Higher taxation is not taxation reform. There is nothing wrong with refunds of tax pre-paid. It there is a problem, it is that the current pension income exclusion is not limited to a tax-free threshold per superannuation pensioner. As for taxing capital gains, that is double taxation as the value of an asset is already the discounted present value of its after-tax income stream.1
- Which part lacks the appalling logic?0
- All of it. I agree entirely with Terry, There is absolutely no compelling reason that any aspect of making changes to refunding overpaid tax has any grounds whatsoever. (And to correct your question, Terry called it an appalling lack of logic; 'lacks the appalling logic' is an entirely different thing).2
- Just curious. Does "reform" ever result in more cash in the hands of taxpayers?
1- When have we had reform? Genuine reform is too scary for the electorate to contemplate, instead we have ad-hoc band-aid fixes and cynical cash grabs.0
- Something on my mind, everyone talks about the $5B cost of Franking. Does this take into account the $1.6m caps that were brought in? Surely that would have a major impact on the $5B. Personally if they made a change to the law, I think we would just see a change in dividend policies so more capital is potentially retained within the corporate. More in line with the US model. Gives the large listed companies more cash for operating and acquisitions. Investors just need to not worry about 'income' stocks and retirees get comfortable with selling small parcels of shares rather than live off dividends0
- Any changes to the franking credit regime would be a very courageous decision indeed.3