Australia’s dividend imputation system was introduced by Paul Keating to eliminate double taxation on dividends from company profits. Under this system, shareholders can use imputation credits to reduce their overall tax liability. The Liberal Government introduced a concession that allowed a cash refund if franking credits exceeded the amount of tax paid.
The idea was straight forward enough – If a company paid 30% income tax on $1,000, ie $300, then it was unreasonable to pay marginal tax on the remaining $700. Otherwise there would be double taxation.
The other principle introduced was in the Superannuation system where we were all encouraged to save for our retirement rather than rely on a Government pension. The deal was that if we saved money in the accumulation phase at a concessional rate of 15%, then when we took a pension, the earnings on the Pension fund was tax free.
So, it was 2 principles, no double taxation and income on your pension fund was tax free. You break one principle then you break the other.
If excess franking credits are abolished then you agree that you are, in effect, paying the company tax on your dividends. Your Pension is no longer tax free.
We are not talking about fairness, cancel the principle of no double taxation or cancel tax free pensions, but keep it simple, stupid. What we are talking about is a complex, convoluted, confusing taxation system. The Royal Commission proved that it is next to impossible to get access to affordable advice, requiring you to get subjected to the horrors of a conflicted advice model needing high commissions to pay for the advice. Note that banks are divesting their wealth divisions as they grapple with the real costs of providing advice to clients without high product commissions.
Now we are looking like getting another taxation rule with exemptions for some. The exemptions include anyone on a government pension or allowance. Watch for the clever financial planning schemes where assets and finances will be shifted around to ensure that you qualify for the minimum pension.
There will be two classes of investors – those that can afford advice and those that can’t.
The Government already took care of those with more than $1.6m in a tax-free retirement income account. You must either transfer the excess amount back into a superannuation accumulation account (15% tax) or withdraw it as a lump sum. Those wealthy investors were forced into a 15% tax account, but their franking credit rebate will continue to be able to offset their tax payable. If you want to argue in terms of fairness, why does someone with $10m in superannuation get a concessional tax rate of 15% and get access to franking credit rebates to reduce that tax payable. So, investors with high balances will not be affected by these new rules.
The Industry Super funds are not clear on how they will be affected by the rules, but if the new system allow their pooled funds to claim the excess franking credits, then there will be an unlevel playing fields between private Superannuation funds (including SMSF’s) and Industry Super Funds.
According to the ATO, as of June 2018 there were 596,225 SMSFs with 1,118,650 members managing $750 Billion. The average assets per SMSF member was $652,000. The demographics of the funds is that approximately 50% of members are aged 60 or over. Given the asset allocation to Australian equities is around 25% to 30%, the franking credit changes will make a real impact of the retirement incomes of the members. Making Australian Equities less attractive by about 1.5% to 2% per annum due to loss of franking credits, will cause re-allocation to other asset classes. With the negative outlook on property prices, there may be an increased tendency to look to invest into overseas assets.