27 Feb LET ME BE FRANK(ED)
LET ME BE FRANK(ED)
There has been a lot of talk about Franking Credits and the refunds paid to many Australians either directly or indirectly through their superannuation/pension accounts. The Labor opposition announced in early 2018 that those people/super/pension funds that receive net refunds in some circumstances will have them abolished and the monies used towards Health, Education, etc.
Franking (also known as Dividend Imputation) was introduced in the late 1980’s to: –
- Avoid double taxation of the same profit, and
- Making sure the government of the day collects taxes at the profit source (from the company), and
- Stop the Alan Bond’s of the World Gearing their company up to the max (loading up with debt) to avoid making taxable profit & hence paying taxes to the government
Let me be frank(ed) & set the record straight for you regarding all the “Myths” that are being perpetuated about Franking Credits
Myth No. 1 – This Is A Rort You Are Getting Money For Nothing
Totally untrue. If you own shares in a company either directly or indirectly, you OWN the business and share in the profits. The company pays 30% tax on it’s taxable profit – therefore you as the owner are effectively paying 30% tax on this profit. When you receive the dividend it carries with it a 30% franking credit to represent tax already paid. You as the taxpayer are entitled to claim a refund of this tax via your income tax return.
Think of it this way let’s say a salary/wage earner gets paid. Out of his or her salary tax is deducted and paid to the ATO. At the end of the year you get a group certificate saying the taxable salary you have been paid (i.e. like a dividend) & taxes paid on the salary (like a franking credit). When the wage earner files their tax return if they have paid too much tax they get a refund
Secondly as the OWNER of the business you are taking the commercial risk of investing in that business. Business profits could fall and dividends (and hence franking credits) are reduced – take Telstra as a recent example. Not only that but the business could go broke and you lose all of your capital invested in that business.
Myth No. 2 – This Is A Retirees Tax
The latest word being used to describe refunds of franking credits to Retirees is “Wealthfare”, in that rich millionaire retirees are milking the tax system for all it’s worth.
Again totally untrue. This measure
will affect all low income earners – potentially anyone who earns < $37,000
pa. This could affect part time workers, those starting out in the workforce earning
low incomes, families where one person earns a low income, children who have investments
placed into shares (and pay penalty rates of tax where they earn > $416 in
any one year)
Myth No. 3 – This Is a Fair Measure
Total Bollocks. Our whole tax system is compromised and to say that this is a fair measure is simply not true. I could list hundreds of inconsistencies with our tax system, but will just put down the main ones here with this tax.
First of all it is a retrospective measure (it affects everyone not just some people moving forward from a certain date) and if introduced raises the spectre of sovereign risk (why won’t future governments then think it is right to make more retrospective rule changes)
It creates different classes of taxpayers that will either lose money or continue to benefit from franking credits i.e. High Income earners will be able to claim the franking credits and offset against their income tax, whilst low income earners will lose theirs.
In some circumstances Super/Pension Funds will be able to get the full refunds (where taxes on contributions/super earnings & > refunds on pension accounts (think Retail/Industry Funds) and some won’t (think Untaxed Super Funds i.e. potentially SuperSA & SMSF’s in Pension phase)
Myth No. 4 – No Age Pensioner Will Be Affected by This Rule Change
Remember we are only going on “press release” legislation, but again Not True.
Labor did a back flip and said those people who were receiving an Age Pension as of 28/3/2018 would not be affected by these rule changes (and if one member of a SMSF was in receipt of an Age Pension as of 28/3/2018 their SMSF would not be affected either).
So you may be affected by the new rules if: –
- You commence an Age Pension post 28/3/2018, or
- Even if you are an Age Pensioner by 28/3/2018 your Retail/Industry Super/Pension Fund does not qualify for a full refund
As I have said to you all many times before, in a future life I want to come back as an Economist, so I can keep making predictions & maybe one day I will get one right.
Myth No. 5 – This Measure Will Raise $55 Bn To Put Towards Health/Education Over the Next 10 Years
Treasury have a difficult enough time making forecasts 1 year ahead, let along somebody making economic forecasts 10 years ahead. Here is my prediction – if rules are introduced as currently announced all investors will change their investment strategies and the Government of the day will not get anywhere near what they are expecting (can anyone say “carbon tax”, or “no child will live in poverty”)
Secondly I can see some Australian retirees just go stuff it, I
will spend up have a great time and then go back onto the public purse by drawing
an Age Pension, using Public Health, etc. creating more cost for generations to
come.
Myth No. 6 – This Will Only Affect The Rich People
Again not true. As I have detailed before people of all levels of income will be affected by this. Retirees will effectively be paying 30% tax on some of their income (dividends) that they are denied claiming the tax credits
Some Of The Hidden Costs Of The Measures
Here is what the ideologues have not considered (and there are probably more too): –
- The ATO would have to administer this system. I would be pretty sure in saying that their systems would not cater for this at the minute and will need adjusting (thus creating another cost for all taxpayers) as: –
- How will they know if someone has started an Age Pension before or after 28/3/2018 (maybe Group Certificates but they will need to do data matching with Centrelink)
- How will they know that one of the members of a SMSF has started an Age Pension before or after 28/3/2018
- Secondly all Super Funds will need to amend their systems. No Super Fund would have a system in place to manage – again cost will be spread over the entire member base. The ATO would also again need to make suitable amendments to cater for collection of the taxes
- The cost of capital for an Australian business. Not many people realise that Australia is a capital starved country. We need monies from overseas to continue to support our economy. During the GFC the Government “lent” their AAA rating to the major Banks so they could raise funds from offshore, otherwise our economy may have ground to halt creating a deep recession.
If the rules are introduced many people will change their investment strategies and stop or reduce their investments in Australian companies. These companies will then find it more difficult to raise capital (the company’s lifeblood), or be forced to pay more for such capital. This has a knock on effect of increasing the cost of business. Guess what then – economic growth suffers and the whole economy suffers as a result.
At the minute nobody has to change any investment strategy, but should the rules be introduced as announced we will be taking pro-active action for affected clients.
Please note that these are my own general personal thoughts (Richie Parsons) and do not necessarily represent those of my licencee LWP Financial Pty Ltd T/As Blueprint Advisor Group, nor do they represent any form of personal financial advice.