The following is a summary of a talk on franking credits that the Association Treasurer Michael Evans gave at the general meeting on 25/03/2019.
Click here to view the supporting document, “Franking Credits and Tax”, which details the terms used in connection with Franking Credits, and the relationships between them; it also has several worked examples.
This is a complex area and I cannot cover all situations likely to occur. I have chosen to look at 3 hypothetical cases, a relatively high superannuation pension/dividend amount ($50,000 pension & $10,000 grossed-up dividend, $7,000 dividend and $3,000 franking credits), a medium superannuation pension/dividend amount ($35,000 pension & $5,000 grossed-up dividends), and a low superannuation pension/dividend amount ($20,000 pension & $2,500 grossed-up dividends). This is big picture stuff and I have ignored factors such as other offsets that may affect the details, but these will not greatly alter the overall picture. Click here to see an overview chart.
I believe the overwhelming majority of people affected by the ALP’s proposed scrapping of refunding unused franking credits will be recipients of taxed-source superannuation pensions, either from a government or through a self-managed superannuation fund; I also believe there are very few non-pensioners who have small taxable-non-franked-share-incomes and substantial income from franked shares.
Franking credits were introduced in 1987 by Keating. The rationale for franking credits was that the company had paid tax on the income from which it paid out the dividend and so taxing the dividend in the hands of the recipient was taxing the same money twice. Franking credits worked like a ‘normal’ tax offset, i.e. if the offset was greater than the calculated tax, the tax payable was zero and the unused portion of the tax offset was forfeited. This arrangement persisted until 2001, with little complaint that it was unfair.
The refunding of unused franking credits was introduced by Costello in 2001. This went well beyond the original rationale for introducing franking credits – avoiding double taxation; since the recipient of the dividend was not paying tax (if he was there would be no excess franking credits) there was no double taxation to be compensated for. Costello was quite specific in his budget speech – the change was to benefit low-income earners, and as the first nine clusters of bars in my chart shows this is what happened. As far as taxed-source pensioners were concerned, after 2001 only people with smallish pensions and franked dividends would have received a payment from the ATO (see the green bars on my chart), these were people for whom the 15% tax offset that these pensions received at that time was roughly enough to offset any tax the pension attracted, leaving little or no taxable income on which to use their franking credits. However, most shareholding taxed-source pensioners would still have paid tax, because their 15% tax offset plus their franking credits would have been less than their assessed tax.
The situation changed dramatically in the 2007 budget which made taxed-source pensions no longer count as taxable income. The 2007 changes show in the groups of bars from 2007 to 2018 in my chart, a high pension/dividend pensioner went from paying ~$2800 in tax in 2006 to receiving a $2,400 refund in 2007. Another considerable increase came in 2012 with the raising of the tax-free threshold from $6,000 to $18,200. A medium pension/dividend pensioner went from being a taxpayer in 2006 to receiving a payment from the ATO in 2007. A low pension/dividend pensioner, who had received a payment from the ATO from 2001 to 2006 (when the high pension/dividend pensioner was still paying tax) saw no increase in payment from the ATO in 2007 or 2012. So, while the 2001 refunding of excess franking credits favoured lower income pensioners, the 2007 changes were regressive.
Untaxed-source superannuants, such as our members, did benefit considerably from the 2007 budget, receiving a 10% tax offset, but taxed-source pensioners whose superannuation pensions became entirely tax-free from age 60 (pre 2007 they received a 15% tax offset) got the additional advantage of having other taxable income assessed for tax and the Medicare levy as if it was their only income. Untaxed-source superannuants like us still have any other income taxed at the marginal rate and are subject to the Medicare levy. Because their pension is taxable income, untaxed-source pensioners who own franked shares are likely to receive smaller refunds for unused franking credits than do taxed-source pensioners with the same share holdings. Also, in 2007 taxed-source pensioners received a concession for pre-1983 service, which untaxed-source pensioners did not
Predictably, many, though not all, taxed-source superannuants oppose Labor’s proposed changes, and if we were taxed-source superannuants we would probably be looking for arguments against them as well. But none of the arguments that I have seen have anything to do with the original rationale for franking credits, the avoiding double taxation; if the ALP’s changes go through the situation will be that which operated with little complaint from 1987 to 2001 (and which for most superannuants continued to 2006); except that, according to Labor, taxed-source pensioners will enjoy the present arrangements.