Franking my dear, we do give a damn as dividend battle hots up

Opinion: It’s been dubbed the “retirees’ tax” by the Coalition while Labor says it’s all about fairness. Here’s why the plan to axe franking credit refunds is causing a big stink.

Franking is a funny word. It’s part classic bloke’s name, part noun, part verb, and you’re going to hear a lot more about it in the coming weeks and months.

Complaints about Labor’s election policy to scrap franking credit cash refunds for share investors, retirees and super funds have been growing louder, yet millions of Aussies wonder what it’s all about.

Put simply, dividend franking comes from the tax paid by a company on its profits. When it hands those profits to shareholders as dividends, it attaches a franking credit for the 30c in the dollar company tax it’s already paid the Australian Taxation Office. This is to avoid double taxation of company dividends.

MORE: Why you’re richer than you think

MORE: Lessons learnt from a lifetime of investing

A typical worker on a tax rate near 32.5 per cent effectively gets their dividends almost tax-free because the franking credit offsets the tax they would usually pay on that income.

High-income earners on the 47 per cent tax rate effectively only pay 17 per cent tax on their dividend income because of these franking credits. People on zero tax rates — such as self-managed super funds and many self-funded retirees — currently get that 30c in the dollar refunded to them.

Share portfolios have propped up many retiree’s finances, but could soon be under pressure.

But under Labor’s election plan that would stop. People could use the credits to get their tax bill down to zero, but there would be no refunds for unused credits.

Less than 20 years ago excess franking credits were not refundable, before the Howard Government changed the rules in 2000.

Now that the rules may be changed back, there’s plenty of angst, and it’s understandable why.

Most tax changes — including Labor’s plans to toughen up negative gearing and capital gains tax — only apply to future investments, but the franking change doesn’t. Many self-funded retirees earn modest incomes from share portfolios and franking credit refunds are a big part of their strategy to keep them off the age pension.

Some say they will lose thousands of dollars a year, and describe the move as like changing the rules halfway through a football match.

Labor Treasury spokesman Chris Bowen said last week that angry retirees were “perfectly entitled to vote against us”, a comment described by the Coalition comment as arrogant.

Retirees often have more free time so can mobilise against Labor in an election campaign. But Mr Bowen has probably crunched the numbers and concluded he doesn’t need their votes, given the policy’s been public for a year and Labor has won plenty of by-elections since then.

More than 50 per cent of Aussie retirees rely solely on age pension payments, while just 21 per cent are fully self-funded and less likely to be Labor voters anyway.

Retirees and investors are going to make some noise, but Labor argues that more government money is currently spent on refunding franking credits than on public schools.

Whatever happens during the countdown to our next federal government, that funny word franking is going to be a big part of the battle.

@keanemoney