The House of Reps Standing Committee on Economics will hold an inquiry into the implications of removing refundable franking credits.
Labor had proposed such a policy in an announcement in March 2018, which I covered in the following Tax Technical article. I have extracted the key aspects of this policy, below. So the inquiry clearly has the Labor proposal in its sights.
The Chair of the committee, Mr Tim Wilson MP, did not expressly refer to the Labor policy, but he was clearly pointing to it, in the Committee’s Media Release, when he said ‘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’ and ‘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.’
Still, there is plainly a political aspect to this inquiry. The Government has effectively referred an Opposition policy, to a Lower House Committee, which the Government controls (with 6 Liberal, 3 Labor & 1 Greens members).
The Terms of Reference of the Committee take aim at Labor’s policy and require it to “report on the use of refundable franking credits, their benefits and the implications of their removal, including:
- 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.’
SUBMISSIONS close on 2 November 2018.
Labor’s policy to abolish franking credit refunds
Labor’s announcement is that franking credit tax offsets would no longer be refundable, under Div 67-25 of the ITAA97.
- This means that a resident individual could only use franking credits to reduce their tax and could not get a refund of any unused excess.
- The same would be the case for resident, complying superannuation funds. Those receiving taxable contributions, should have no problem using all their credits. Those in accumulation phase might be able to use all their credits (but not if all their investments were in resident company shares paying fully franked dividends (because they’ll be paying 15% tax on their earnings and franking credits are at 30% or 27.5%). There’ll be less problem using all the franking credits if the fund is receiving taxable contributions. A fund in ‘pension phase’ (paying $nil tax on its investments) will not be able to use all their credits (and will lose the refund) unless it has enough tax to pay on contributions it receives.
- The measure is principally aimed at Self Managed Superannuation Funds (SMSFs), which typically only have 1 or 2 members, and when in pension phase, are most unlikely to be able to use all it’s franking credits.
- Other victims include retirees receiving exempt superannuation benefits, who also have some shares in their own name. Unless they have enough tax to pay, from other sources, they too, will lose refunds.
- Further victims include non-retiree individuals, with low taxable income (for whatever reason) and some franked dividends, in their own name. This might include persons who negatively gear, or it might those with truly modest means.
Not covered by Labor’s policy are:
- ATO-endorsed income tax exempt charities; and
- Not-for-profit institutions with DGR status ‘(Deductible Gift Recipient’ status) – eg universities.
- The Future Fund, which received $0.8 billion in the 2016/17 year (in other words nearly $1 billion a year).
The belated pensioner exclusion – In the face of the storm created by its initial announcement, Labor then announced:
- Every recipient of an Australian Government pensioner allowance, with individual shareholdings, will still be able to benefit from cash refunds. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstartand Sickness Allowance.
- Self-managed Superannuation Funds (SMSFs) with at least one pensioner or allowance recipient, before 28 March 2018, will be exempt from the changes.
CPD questions (answers available)
- Has the Government effectively referred Labor’s policy to abolish refunds, of excess franking credit tax off-sets, to a Parliamentary Committee, that it controls?
- Do the ‘Terms of Reference’ mesh closely with Labor’s policy?
- Will Labor’s policy adversely affect investors who are ‘individuals’ and SMSF’s?
- Can tax exempt charities and DGRs, together with the Future Fund, currently get refunds of excess franking credit tax offsets?
- Will they be adversely affected, by Labor’s policy, too?
- Do individuals who receive Commonwealth Pensions currently receive refunds of excess franking credit tax offsets?
- Will they be adversely affected, too?