"This is why refunding franking credits to taxpayers who pay no tax is a gift or a welfare payment from the Govt, which, in my view, has no social or economic justification."
It depends on who you consider is the ultimate tax paying entity. The effect of the imputation system is to notionally restore to the shareholder the tax that is paid by the company as if the shareholder had received it as part of their dividend. Indeed, the franking credit is added to the shareholder's income. Then the tax to that is ultimately to be paid is determined according to the shareholder's particular circumstances. In effect, the company only pays the tax to the government on the shareholder's behalf. When viewed that way, the cash refunding of imputation credits to non-tax paying shareholders is entirely reasonable. It restores the non-taxpaying shareholder to equal footing with other shareholders. The non-tax paying shareholder took the same investment risks as any other share holders. The fact that the company paid the government tax on behalf of the shareholders shouldn't give the government the right to hang onto it if the shareholder happens to be in a non-tax paying category. The non-taxpaying shareholders want the tax that was paid by the company added back to their income just as is done for all the other shareholders!
"The article is also in error saying that removing the franking credit refund means that people with a SMSF in the pension phase have an incentive to move to an industry or retail fund. This is false, as accounts in an industry and retail fund in the pension phase are proposed, under the Labor Party's policy, to be taxed exactly the same way as SMSFs. That is, pension funds operated by retail and industry funds also lose the franking credit refund so there is tax neutrality between these funds and SMSFs."
This does not accord with what a number of commentators are saying on this subject. They are saying that non-tax paying fund members will benefit from the unused franking credits of tax paying fund members. I assume that that can occur because the funds are pooled within the overall industry fund. Individual fund members effectively have an allocation of that pool.
Robert Gottleibsen has suggested what would be fairer and cleaner change that Labor could implement to raise the money that they want to spend in other areas. That would be to lower the percentage of imputation credit. Instead of crediting the shareholder with all the tax paid by the company, credit them with something less than 100%.. That would apply to all shareholders equally. As it stands, Labor have created exceptions for pension recipients. Exceptions are a bad thing. I was astonished to learn recently that Australia has one of the least efficient tax systems. We waste about 12% of tax in administration costs, whereas in some other developed countries, the figure is reckoned to be around 5% or less.
The cash refunding of imputation credits has been in place for nigh on 20 years. The particular unfairness of what Labor are proposing is that it will hit self-funded retirees who have budgeted on the not unreasonable assumption that the same regime would continue. It is pretty unusual to raise the tax rate of a class of people by 30% in one foul swoop, but in effect that is what Labor are proposing to do. They have obviously made the calculation that the people affected were probably not Labor voters anyway, so who cares. Most of the rest of the voters scarcely know what an imputation credit is, let alone a cash refund of one and could not care less.
King Louis 14th's the hard working finance minister, Jean-Baptiste Colbert (1619 - 1683), summed up the problem that all politicians face when aspiring to government. He said: "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing."
It appears that labor have taken Colbert's aphorism on board, but it doesn't mean that their proposal on franking credit refunds is fair and reasonable in all the circumstances, or indeed that it is an optimal way to raise the funds that they want to spend in other directions.
