In the topsy-turvy world of Australian politics, it’s hard to predict exactly when the next federal election will be held, let alone the likely outcome.
Nonetheless, the Australian Labor Party has declared its policy intentions on a number of fronts, including a proposed change regarding franking credits – an area that will affect a number of our clients should the ALP win government.
Whichever way the next election pans out, we think it’s important to think proactively about possible outcomes. Over the last couple of months we’ve been developing strategies to eliminate or reduce any potential negative impact on client’s portfolios should the ALP’s policy on franking credits come to pass. (Please note, the changes we are proposing will maintain current benefits if there is no change in government.)
What’s being proposed by the ALP?
If elected, Labor will ban refunds of excess franking credits. This means that investors (excluding Age Pension recipients) who currently receive a refund from the Australian Taxation Office because the amount of franking credits they receive exceeds the tax they need to pay, will no longer receive the refund.
SMSFs that had at least one member receiving the Age Pension on or before 28 March 2018 will still be eligible to receive franking credit refunds under Labor’s “Pensioner Guarantee” if the policy goes ahead.
Although there is some merit in the policy, the fact that many of our clients have entered retirement under the current rules, and in a number of cases would be seriously affected financially, is disappointing.
What are franking credits and how do they benefit you?
Under our existing tax system, companies pay 30 per cent tax on their profits. When these profits are then passed on to their shareholders in the form of dividends, the company also hands the shareholders a credit for the tax the company has already paid (the “franking credit”).
The individual shareholder then pays tax on the profit they received from the company less the credit for the tax the company has already paid. The franking credit ensures that the company profits are taxed at a shareholder’s marginal tax rate.
Those investors in retirement phase who have a zero tax rate currently receive a full refund of the tax already paid by the company on their behalf.
Other investors benefit by franking credits reducing the tax they pay. They may also receive partial refunds of their franking credits, depending on their overall tax liability.
What action are we taking?
We are currently reviewing the potential impact on each client’s portfolio in the event that Labor is elected at the next Federal election and their proposed changes to franking credits are legislated. We have identified strategies to mitigate the effect of these proposed changes and we will be in further contact with you if changes need to be made.
If you have any questions about this or any other matter, please don’t hesitate to contact us.