With the disarray of the Federal Coalition, the prospect of a change of government next year is an increasing possibility.
One of the proposed changes to legislation floated by the Labor opposition relates to the system of dividend imputation.
Presently, shareholders who receive dividends from the companies they have invested in also receive tax credits (franking credits) for the tax paid on the company’s profits. These are typically at the rate of 30%.
How does this system work?
As an example of what this means in practice today:
- if a company makes a profit of $10 per share, it will pay tax of $3 and can pay a dividend to shareholders of $7.
- the shareholder will receive a cash payment of $7, and a tax credit of $3.
- When the shareholder does their tax, both the cash dividend and the tax credit will count as income, and they will therefore pay tax on income of $10.
- If their tax rate is above 30% they will pay an additional amount to cover the difference between the $3 in tax already paid, and what is still owing.
- If however their tax rate is below 30% they will receive a refund of the excess tax paid by the company on their behalf.
This policy is particularly beneficial to low tax rate shareholders, including retirees with low levels of taxable income, and superannuation funds paying pensions (where no tax is payable on the investment earnings). This is because the refund of franking credits increases their cash income.
Since the proposal was first announced, the Opposition have softened their position due to the outcry. Their current proposal exempts any shareholder who is also a recipient of any social security pension or allowance. This means such people they would continue to be refunded excess franking credits.
So who would be impacted?
Self-funded retirees would be the group most impacted by this proposal.
Those with Self Managed Super funds which are all in pension accounts and those with investments outside super but who’s taxable income is below $23,000 will bear the brunt of the burden.
Surprisingly, individuals with superannuation balances exceeding $1.6 Million will be less affected than smaller account balance holders. This is because they are already paying tax on the earnings on monies above the $1.6M threshold.
The proposed changes are unlikely to apply to all people though. It appears that SMSF’s will be the hardest hit.
Superannuation pension recipients with retail or industry super funds are likely to continue to re-ceive the full benefits of their franking credits.
This is because their funds are part of a larger trust which has many members in the accumulation phase of super. These members receive SG Contributions and Salary Sacrifice Contributions on which contributions tax is payable. There is also tax payable on their investment earnings.
These funds could use the franking credits from the pension account owners to offset the tax pay-able to the ATO by the accumulation account owners. The super fund trustee would then transfer the tax from the accumulation accounts to the pension accounts.
So, what can I do about it?
For SMSF owners, it might be worth considering whether the benefits of maintaining your super fund exceed the cost of the lost refund of franking credits if this legislation is passed.
Despite the threat this proposed legislation represents, it is important to note that at this stage it is just a proposal by an opposition party. It is therefore a long way from passing into law.
We would not recommend any changes to your current strategy based on the possibility of this passing into law.
This article is designed to highlight the potential impact, and also illustrate that there may be opportunities to mitigate this if necessary.
If you would like to discuss how you may be affected by this, please contact us.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change