Proposed Franking Credit Policy changes

The Labor Party has proposed significant changes to existing franking credit policy if they win the Federal election in May. Also known as imputation credits, a franking credit is a nominal unit of tax that allows Australian companies to pass on tax paid to shareholders under dividend imputation. Under the new proposal, cash refunds will no longer be allowed on imputation credits from 1 July 2019.

Current franking credit policy is designed to stop the double taxation of company profits. For example, when a company generates profit, they are required to pay tax on their earnings. If they pass on this profit in the form of dividends, the shareholders are entitled to franking credits as a nominal unit of the tax paid by the company. Because franking credits are passed on to shareholders along with dividends, the net revenue for the government is often nil.

Under the proposed changes, the Labor Party will still allow imputation credits to be used to offset tax payable, but will disallow cash refunds on excess imputation credits. In many ways, this is a return to old policy, with the Liberal Party only changing the rules in 2000 to allow taxpayers to claim a refund. Franking credits will still be passed on to shareholders along with dividends, but it won’t be possible to receive a refund on excess amounts.

The new policy will have a number of implications for Australian taxpayers, including self-funded retirees and other groups who receive non-taxable income as shareholders. While Labor will be putting exemptions in place for charities, not-for-profit organisations, and pensioners, self-funded retirees not receiving a pension may fall between the cracks. While franking credits do benefit the rich disproportionately, around 900,000 self-funded retirees may find themselves in a worse financial position as a result of the changes.

In order to mitigate potential losses, self-funded retirees and other affected Australians may need to change their current investment strategies. Even if the changes are introduced at the start of the next financial year, there is still a window of opportunity for people to collect credits on high yield stocks and look for a way to replace lost income with other investments. Whether it’s putting a renewed focus on high returns, investing in global equities, or moving money into property assets, there are lots of ways to stay flexible and protect your income.

While the proposed changes stand to affect many Australians, there is still a number of hurdles which must be passed before the proposals are legislated.

If you’d like to discuss you current situation or any points in this article further, please contact one of our Financial Specialists today. Alternatively, you can complete your details below and we’ll be in touch or give us a call on (03) 9835 8200.

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