Franking Credits - Brilliant article, 38432769, page-17 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

Originally posted by corp01: ↑

Thank you Downanout for your comments.

With respect, the problem I have with your analysis is that you arere-interpreting the policy intention/rationale of the dividend imputationsystem. The policy intention/rationale of the dividend imputation system is toensure that dividend income is not taxed twice (as mentioned in Mr Carling'spaper). Prior to the introduction of dividend imputation (which I think was1987) corporate income was taxed at the company level (company tax) and theshareholder level via dividends (income tax). The policy intention/rationaleof the franking credit system is to ensure that income tax does not apply todividend income to the extend tax has been paid at the company level. Thepolicy rationale/intention of dividend imputation is notto ensure that "the company only pays the tax to the government on the shareholder's behalf." That is, the original policy intention/rationale is not to eliminate company tax paid by refunding this amount to the shareholder if they pay $0 tax. Further, providing a franking credit refund does not "restore the non-taxpaying shareholder to equal footing with other shareholders." To the contrary, it makes the non-taxpaying shareholder better off relative to the taxpayer shareholder by (potentially) 30 per cent (ieby the size of the franking credit refund). No Govt (country) in the world is so generous to provide non taxpayers a benefit which effectively reduces tax paid at the company level (ie, by collecting company tax and refunding part of the company tax collectedto a certain group).

The Howard Govt changed the dividend imputation system in 2001 by providing franking credit refunds solely for political reasons. It was a decision they made ahead of the federal election to ensure they were able to retain a few seats they lookedlike losing by handing a benefit reflecting the demographics of those seats (ie, seats with relatively high number of voters who were retired). Refunding the franking credit is a very expensive gift/welfare payment (around $6 billion) which is eroding the CommonwealthGovt's revenue base. The Howard Govt took another bad decision at that time of stopping indexation of the petrol and diesel excise duty (again a decision taken for political reasons). This measure, combined with refunding franking credits, both materiallyeroded the Govt's revenue base over time, and is an important reason explaining why the Govt had budget deficits since 2006. The current Govt reversed the indexation of the petrol and diesel excise duty a couple of years ago, and now the franking creditrefund decision needs to be reversed to assist with the long term sustainability of the Govt's budget position and to provide additional resources to fund improved low cost health care (such as for cancer patients) etc.

On the point SMSFs in the pension phase having an incentive to move to an industry or retail fund, the newspaper journalists have not done their homework. Under current superannuation law, industry and retail funds have two pooled funds. One pooled fund is in the accumulation phase and is subject toa 15% tax rate. Therefore, industry and retail super funds in the accumulation phase can use the franking credit so that dividends are not taxed twice (once at the company level and once in the super fund). This in itself is a generous policy positionbecause these funds typically have surplus franking credits (stemming from the tax rate in the super fund being 15% while the company tax rate is 30%) which enables them to also reduce their overall tax liability (because some of their income is unfranked (as as interest)).The second pooled fund is a fund in the pension phase and the tax rate is 0%. These pooled funds currently benefit from the franking credit refund. (Note, the beneficiary of a fund can elect to transfer their super money from the accumulation fund to the pensionfund (subject to the $1.6 million cap introduced from July 2017) once they have retired.) Under the Labor Party's policy, the franking credit refund is proposed to be removed in respect of pooled funds in the pension phase. Consequently, all super funds(SMSFs, industry and retail super funds) are proposed to be taxed exactly the same way (as is currently the case). In other words, the Labor Party's policy is not introducing a new tax distortion into the system.

Finally, as you can tell, I am supportive of the policy to remove the franking credit refund. This is notwithstanding that I have a SMSF in the pension phase and receive a franking credit refund of around $10,000 per year. There is no economicor social justification for the Govt to provide people like me a gift when there are so many disadvantage and poor people that really need Govt assistance. In assessing the merits of the Labor Party's policy, I suggest you need to ignore self-interestand assess the policy position on its merits.

Expand

Ok Corp01,
Could you supply a link to support your contention that superannuation law requires a complete segregation of pension and accumulation accounts in pooled funds[or multimember smsf's for that matter], such that unusable franking credits in one area cannot be used to offset tax from other areas.[take note of the last part of the sentence]
I would point out that there are no commentators that seem to agree with you. Not few, but apparently none.
If you have found any that I have missed, feel free to share.
It might also be to your benefit, both intellectually and financially, if you were to seek the views of someone like Australian Super on the subject.