Another Franking Credit thread

The below is from the newsletter you'll be getting from your accountant. Their position is pretty clear, and aligns with mine. If you are sick of reading about it, and just want a snippet, I have underlined their simplified analogy.

Proposed FrankingCredit Denial

Mr Shorten’s proposed changes on this front are rightly described as a retirees’ tax as over 900,000 retirees’ will be affected in the negative because it denies them the refund for the unused franking credits from their share investments.

Their argument is based on the incorrect assumption that because you did notpay tax you should not be entitled to the refund.

In the first place, the tax was paid by the company you invested in and secondly, in arriving at your taxable income you must include the franking credits as part of your taxable income. The process effectively means that you are taxed twice on your share of dividends, once at 30% company tax rate paid by the company and once at your marginal tax rate paid by yourself.

If your marginal tax rate is higher than 30%, it means you end up paying extratax on those dividends but if it is lower, presently you would get a refund,later on you will not.

The analogy is PAYG wages, if you are taxed more than you should, the ATO would refund you the excess, if you did not pay enough, you would have to pay the ATO the difference at the time of lodging your return.

In both cases the franking credits and PAYG withholding are paid directly to the ATO so that in fact you only receive the net cash but you still have to include the grossed up figures in your tax return and your tax rate is that applicable to the grossed up taxable income. Therefore, to say that you have not paid tax is wrong in fact.

Additionally, you also pay Medicare levy at 2% of the grossed up taxable incomenot on the income without the franking credit and/or the PAYG withholding unless of course your total income is below $21,980 threshold.

In essence the ALP policy would reduce your disposable income by approximately$127 per week.

If you are in pension mode, chances are your earning ability is greatly reduced so to make up the shortfall in disposable income you would be forced to eat into your capital which leads to greater reliance on the old age pension.