Tax & ATO News Australia

Franking Credit Proposed Changes

Politicians just cannot help mucking around with tax laws. I am not the first person to talk about this, and right now I am obviously not the only person, as the Federal Opposition’s latest thought bubble on refunding franking credits is roundly and rightly criticised.


In the interests of fairness and balance, I want to talk about another ill-thought out and retrospective proposed change which the current Federal Government is planning to make to small business concessions. But before I do that, just one quick comment in relation to the Opposition’s franking credit problem that I have not seen anyone make. Bear with me – this is a bit mathsy:


The Opposition’s proposal is that the government will stop drawing cheques to people who receive franking credits in excess of their taxable income. Practically, as has dominated the press in recent days, this targets self funded retirees who received franked dividends from companies, but do not have large taxable incomes because they are receiving tax-free superannuation pensions. The theory apparently being, well hey, they are not going to vote ALP anyway. So far, so cynical. And to someone who doesn’t understand how franking credits work, it kind of makes sense: why should the Government be sending out cheques to all of these wealthy old people?


But here’s the rub – there is absolutely zero difference to the budget bottom line whether a rebate is represented by a payment from the government or a reduction in tax payable by a tax payer. In either case, this is money that government does not have.


To give you the example, take two people: Vince a self funded retiree with a self managed superannuation fund with $1,000,000 of Australian blue chip shares in it, and a Federal Politician with a randomly selected salary of $375,588 per annum and the same number of shares. We’ll call him Bill. Let’s ignore Bill’s perks and any other tax breaks – I have never acted for a Federal politician in a tax matter, and frankly I’m happy to keep it that way.


Vince receives fully franked dividends of $50,000 per annum. The way franking credits work is that is cash of $35,000 and franking credits of $15,000. Vince therefore has pension income of $50,000, from which he is exempt from tax. Under the current system the franking credits are refunded to him, so he gets $15,000 from the Federal Govt. This is what the Opposition wants to stop.


Bill on the otherhand is on the top marginal tax rate. He pays lots of tax – if you ignore his fully franked dividend of $50,000 (same as Vince’s) he pays $142,246.60 in tax (before medicare levy). But watch how Bill’s full franked dividend of $50,000 is treated. He gets the same amount of cash - $35,000. But as a result of the franking credit, his tax bill only increases to $149,746.60. If he didn’t get the franking credit, his tax would have been $164,746.60.


In other words, Bill gets the full use of the Franking Credit, because he pays $15,000 less tax than he otherwise would, whereas Vince misses out on the benefit completely. Put in reverse, the Federal coffers pick up $15,000 from Vince, the pensioner on $35k per annum, but don’t get the $15,000 from Bill, the politician on $275,746, after tax.

 

Not very fair is it?


My good intentions of providing balance must be sacrificed on the altar of brevity. I have already gone on too long. I will criticise the Government in Part 2.
 

Posted in: Tax & ATO News Australia at 19 March 18

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Tax & ATO News Australia

Author: David Hughes

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