Thursday, 15 March 2018

Let's talk about excess franking credits and why they have been money for jam for the last 17 years

This is what the Australian Taxation Office (ATO) states about imputation:

Dividends paid to shareholders by Australian resident companies are taxed under a system known as imputation. This is where the tax the company pays is imputed, or attributed, to the shareholders. The tax paid by the company is allocated to shareholders as franking credits attached to the dividends they receive.

Dividends and franking credits

If you receive franking credits on your dividends, you need to let us know your:

* franked amount
* franking credit.
If you are an Australian resident, we will use this information to:
* reduce your tax liability from all forms of income (not just dividends) and from your taxable net capital gain
* refund any excess franking to you after any of your income tax and Medicare levy liabilities have been met.

You are eligible for a refund of excess franking credits if all of the following apply:

* You receive franked dividends, on or after 1 July 2000, either directly or through a trust or partnership.
* Your basic tax liability is less than your franking credits after taking into account any other tax offsets you are entitled to.
* You meet our anti-avoidance rules, which are designed to ensure everyone pays their fair share of tax.

If you have received a dividend that has Australian franking credits attached from a New Zealand franking company, you may be eligible to claim the Australian sourced franking credits.

The policy of giving cash back for unused franking credits was introduced in 2000 by then Howard Government treasurer Peter Costello and for the last 17 years it has been systematically rorted by superannuation funds, private corporations, trusts and individuals - to the point where Treasury pays out an est. $6 billion per annum under this scheme.

With one individual whopaid no income tax reportedly received millions claiming cash for unused franking credits and the average unused credits cash back payment for people in the top 1% of self-managed super funds being est. $83,000 a year.

In March 2018 Federal Labor announced a policy effective January 2019 which removes claims for franking credits - but only in those years that the prospective claimant has no income tax liability payable.

So ending taxpayer-subsidised money for jam for around est. 9 per cent of the population who were receiving cash refunds for tax they had never paid .

Turnbull, Morrison & Co then came out fighting – accusing Opposition Leader Bill Shorten of robbing low income self-funded retirees and aged pensioners.

At that point, somewhat predictably, embarrassment for the Turnbull Government began…..

What Treasurer and Liberal MP for Cook Scott Morrison considered low income retirees was elucidated.

The Australian, 14 March 2018:

A retired couple living in a $2m house, with $3.2m in super, are classified as ‘‘low income’’. They have no income tax liability. They could also have an investment property and still wouldn’t have a tax liability because of the bizarre “senior and pensioners’ tax offset”, which lifts their effective tax-free threshold to about $58,000.

Turnbull & Co were accused of telling political lies.

The Guardian, 14 March 2018:

You won’t have missed the foghorn blast from the Turnbull government and its media amplifiers that has accompanied Labor’s latest bold foray on tax policy.

Scott Morrison has declared Labor is stealing tax refunds from pensioners and low-income retirees, and Malcolm Turnbull says Bill Shorten “is going after the savings of your parents and their friends and their contemporaries”.

So how do these terrifying-sounding claims stack up?

Let’s bring in the respected economist Saul Eslake, who has no political dog in this race. Eslake is blunt. He says the government’s posturing is “misleading in the same way that most of what Scott Morrison said about Labor’s policy on negative gearing was misleading”.

To understand precisely what is misleading – the first thing to know is when we are talking about Australian retirees having low incomes, often what that means is people have low taxable incomes.

Income from superannuation funds is tax free once people turn 60. Eslake says the decision to make income from super tax free is “top of my list of the dumbest tax policy decisions of the last 25 years”.

It means people with substantial assets, and big super balances – millionaires in fact – are in a position to report low taxable income, and in fact structure their affairs to ensure they have low taxable income.

They were also quite rightly accused of knowing that dividend imputation à la Costello is an expensive rort.

The Sydney Morning Herald, 13 March 2018:

Treasury considered dividend imputation reform in the lead up to Treasurer Scott Morrison's last budget, creating a dossier entitled "Tax Policy - Dividend Imputation" more than a year before Labor announced it would target the tax refunds of more than one million Australians on Tuesday.

The confidential file itemised in a list required to be disclosed by departments as part of freedom of information requirements was opened by Treasury in the first-half of last year.

Fairfax Media understands Treasury has been examining withholding dividend cheques from non-taxpaying shareholders ahead of this year's May budget.
Investigating potential savings needed to fund budget initiatives such as personal income tax cuts is normal practice in the pre-budget period.

Mr Morrison said on Tuesday the "government has never entertained" changes to the way it gives cash back to shareholders in response to a policy he described as a "cruel blow for retirees and pensioners," but his predecessor Joe Hockey first asked how dividend imputation could be improved - not replaced - three years ago. 

A white discussion paper on tax reform commissioned by Mr Hockey and completed by Treasury in 2015 found "there are some revenue concerns with the refundability of imputation credits," indicating the department was receiving lower tax revenues than it expected. 

"It provides a greater incentive for shareholders of closely held companies to delay distributions until a time when individual owners are subject to a relatively low tax rate, to receive a refund of tax paid by the company." 

The list published by Treasury shows the department's work on dividend imputation policy continued after Mr Morrison became Treasurer in 2016…..

Labor, which has not released Parliamentary Budget Office costings of its policy, said it planned on cancelling an average cash refund of $5000 on share dividends from 8 per cent of taxpayers, including 200,000 voters who self-manage their own super funds and 1 per cent of full pensioners..….

Image found on Twitter

"Rethink: Better tax, better Australia" discussion paper information here and submissions here.

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