First, Downanout asked "If the cash refunding of franking credits is such an egregious wrong, why is labor prepared to continue doing it for recipients of a part pension?" The answer is political reasons to soften the measure for a particular group. You might recall the Labor Party originally announced the measure last year without a concession for people on the age pension and then a few days after this announcement they announced a concession for people on the age pension. This means that this group retains the gift and are better off relative to others on the age pension who do not own shares that pay franked dividends. In other words, if the person on the age pension owns instead shares that pay unfranked dividends or an investment property that is positively geared (ie does not generate a loss), then why don't they also get a gift/additional welfare payment from the Govt just like the person on the age pension who owns shares which pay a franked dividend? So for equality reasons it is just wrong policy to exempt people on the age pension.
Second, re comment on the Australian share market and "the franking credit system has assisted capital formation in Australia by encouraging Australians to invest in Australian companies". Some people argue that the franking credit system is distorting investment behavior in Australia as it encourages investors to invest is shares that pay fully franked dividends and it encourages companies to distribute dividends instead of investing in the company to create capital growth. On the latter point, we are now seeing this with mining companies (eg BHP and RIO) focusing on paying dividends to boost the share price and less inclined to take risk and invest in new projects. Removing the refunding of franking credits goes some of the way to lowering this distortion. It also explains why other countries have not moved down the Australian path or if they did in the 1980s have subsequently abolished, at least in part, the system (eg the UK).
Third, I like to address what Scott Morrison actually said in the debate on Wednesday night and the rationale for abolishing franking credit refunds in a another way than I attempted above. In the case of someone with an income tax liability and on a marginal tax rate of 30%, they receive a fully franked dividend of $70 because the company has paid tax of $30 company tax on a $100 profit. This means that the Govt collects $30 in company tax revenue and the person pays no income tax on the $70. In other words, the franking credit system ensures that the $70 dividend is not subject to income tax (because the person is on a 30% marginal tax rate). In the case of someone with no income tax liability (because they are under the tax free threshold or because they are a SMSF in the pension phase), they receive a $70 dividend plus a $30 refund from the Govt, while the Govt receives $30 in company tax and pays this $30 to the person outside the income tax system (ie the person outside the tax system is getting a $100 return and the Govt gets $0 in net revenue, while the person inside the tax system gets a return of $70 and the Govt gets $30 in tax revenue). Clearly, the person getting the $30 refund is better off by this amount relative to the person inside the income tax system and the Govt is $30 worse off. The problem with what Scott Morrison said the other night is that he asserted that the person inside the tax system gets a $30 payment from the Govt in their pocket so therefore the Govt needs to pay $30 to the person outside the tax system to ensure equality. This assertion is clearly wrong and a misunderstanding of what the franking credit system is seeking to do (ie remove the double taxation of dividends).
Fourth, re comments on the tax generosity of the superannuation system, the $1.6m cap of funds in the pension phase goes a long way to addressing this issue. Removing the franking credit refunds also is a step in the direction of reducing tax concessions within the superannuation system. In terms of the future, it would be a very brave Govt to introduce a "graded tax scale on superannuation pensions" so that pension payments are not entirely tax free post the age of 60. Instead, I think there is a risk that a future Govt might decide to lower the $1.6 cap to reduce the cost to the Govt of providing the superannuation tax concessions.
