Labor’s dividend disturbance — what will it mean for you
LABOR’S plan to stop refunding tax credits from dividends will affect super funds, retirees and investors. Here are the basic facts you should know and how it will affect you.
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LABOR leader Bill Shorten has announced he wants to axe cash refunds of tax credits received by Australian shareholders and super funds.
So what does this mean, and how might it affect you?
WHY DO THIS?
Two reasons: It saves a huge pile of money, and Labor says it helps address the “unsustainable largesse for high-income earners”.
However, critics have been quick to say that many low-income retirees — perhaps those with a handful of shares such as Telstra or the Commonwealth Bank — will also be hurt financially.
HOW ARE DIVIDENDS TAXED NOW?
Dividends paid by Aussie shares come with an attached credit for the 30 per cent tax that companies have already paid. These are called franking credits or imputation credits and prevent profits from being double-taxed.
Shareholders use these 30 per cent tax credits to offset their other income, but if they are not paying tax — like many pensioners, self-funded retirees and super fund pension accounts — they can get a refund of the credits.
Some wealthy investors receive $2.5 million in cash from the government each year because they technically pay no tax, Labor says.
RETIREMENT: Australia’s hidden death tax
WHAT WILL IT MEAN FOR THE BUDGET?
Labor says it will save the Federal Government $59 billion over 10 years. That’s good news for a budget struggling with deficits and a weak economy that’s failing to boost tax revenue elsewhere.
John Howard introduced the current refund system in 2000 when it cost $550 million a year. Now it’s above $5 billion a year and growing.
HOW WILL IT WORK?
Shareholders will still get the tax credit to reduce their tax liability, but a federal Labor government would no longer give cash refunds to people whose taxable income is zero.
Labor says no one will pay additional tax and this will take it back to the original system introduced by Labor’s Paul Keating,
HOW MANY PEOPLE WILL BE AFFECTED?
Labor says it will not affect 92 per cent of almost 13 million Australians who lodge tax returns. That still leaves 8 per cent affected, equating to about one million individuals.
And many retirees do not lodge tax returns, and instead are allowed to fill out a simple two-page form to get their franking credits refunded.
The move could also affect share prices of high-dividend payers such as the big four banks.
WHAT HAS BEEN THE REACTION?
A mix, but mainly negative. Treasurer Scott Morrison has described it as “theft” and said it would hit low-income earners and pensioners who own shares.
Super industry group ASFA also said it would have a significant impact on low-income retirees.
“If there is a concern about individuals with large retirement savings receiving the benefit of refundable imputation credits then this would be better addressed by measures more closely linked to retirement balance,” ASFA CEO Martin Fahy said.
“At face value, it appears that this proposal would impact mum and dad investors both through their superannuation and through the shares they own outside of super.”
Australian Shareholders’ Association CEO Judith Fox said: “The potential for ongoing tweaking throws retirement planning into disarray”.
However, Industry Super Australia CEO David Whiteley said the changes were “sensible” but the proceeds should be reinvested to improve the super system.
“Super funds where most Australians have their retirement savings will be largely unaffected by this proposal because the imputation credits are exhausted offsetting tax liabilities of the fund,” he said.
