New bid to block retiree refunds

The spectre of the controversial franking credits claw-back was raised again this week, only this time it was the Coalition Government which wanted to know if withholding it from retirees stacks up.

Treasurer Josh Frydenberg on Wednesday announced a standing committee of the House of Representatives would investigate the implications of removing refundable franking credits.

It is a backflip from the position it had up until recently taken in opposing Opposition Leader Bill Shorten’s proposed retention of these tax refunds from shareholders in March this year.

To be chaired by Liberal MP Tim Wilson, the standing committee is taking submissions until 2 November.

“The ability for investors, including individuals and superannuation funds, to claim their full credits is an established feature of our tax system and is core to the financial security of retirees,” Mr Wilson said at the announcement.

“There has been legitimate community concern about proposals to remove cash refunds for their full allocation of credits for individuals and superannuation funds, and that it amounts to a tax on the savings of retirees.

“The committee is examining what impacts the removal of refundable franking credits would have, particularly on retirees who have made long-term retirement saving decisions based on their ability to claim refunds on their franking credits and whether it will compromise their financial security,” he said.

Shareholders who receive fully franked dividends are entitled to offset the tax paid by the company on their behalf against tax liabilities they have. The amount that can be claimed is called the franking credit.

In the case of retirees, most who have an income below a certain threshold will have a personal marginal tax rate of zero. People in that category are not expected to pay any tax and thus are entitled to a refund of tax paid on their dividend by a company on their behalf.

At YourLifeChoices we know that withholding the credits – also known as dividend imputation and imputation credits – would slice into the earnings of many of our members.

In our recent major poll, the 2018 Retirement Matters Survey, more than a third of you told us that you own shares in addition to those held in superannuation funds.

More than 5000 members answered the question on shares. If we extrapolate the number who are independent shareholders across our entire membership of 250,000, it means up to 85,000 of you will have your income reduced if imputation credits are not paid.

The committee’s terms of reference include inquiring into the potential effects of :

  • analysis of who receives refundable franking credits, the opportunities it provides to offer alternative savings and investment vehicles to low and middle income earners, and the impact it has on lowering tax bills
  • consideration of how refundable franking credits support tax principles, particularly implications for tax neutrality, removal of double taxation and fairness
  • if refundable franking credits are removed; who it would impact and how, and the implications from expected behavioural change by investors, including for:
    – increased dependence on the pension
    – stress and complexity it will cause for Australians, including older Australians to adjust their investments
    – if there are carve-outs applied, what this might mean for additional complexity, uncertainty and fairness
    – reduced incentives to save and distortions to which asset classes are invested in and funds are used, and
    – the reliability of providing a sustainable revenue base over the longer term.

Will you continue to be able to afford your retirement if franking credits are withheld from you? Will you be forced to apply for the Age Pension if the Government decides not to refund this tax?

Related articles:
Franking credits: Saul Eslake explains
Are you owed a tax refund?
Labor declares war on retirees

Written by Olga Galacho

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