Cuffelinks' Facebook debate on Labor franking

Time to debunk a few myths perpetrated by politicians who seem to rely on dubious ideology as opposed to fact.

The franking credit imputation system is not tax evasion or tax avoidance, but a fair and legitimate process to eliminate double taxation. Where a shareholder receives a fully franked share dividend, that cash payout is 70% of the intended dividend entitlement - the balance has been paid as tax at the corporate tax rate of 30%.

Individuals legitimately can claim the tax paid at the corporate rate as an offset to assessable income, remembering that the 'imputed tax' must be included in the final calculation of assessable income.

Individual tax refunds can arise in circumstances where an individual's marginal tax rate is lower than the the current corporate tax rate - trusts pay a flat 15% while self managed superannuation funds are tax free for income earned on pension assets (currently capped at $1.6 million).

Obviously retirees who have adopted an smsf structure stand to lose substantial retirement income, should the refund of imputation credits be voided.

In effect Shorten has flagged the introduction of a wealth tax, to be funded mainly by self funded retirees and others not granted exemption. While on the topic of exemptions, it is interesting that members of industry super funds will not be impacted adversely, as these funds (unsurprisingly) are exempt.

Clearly this policy is discriminatory in its selective application. The overall financial benefit may or may not eventuate as retirees react to the prospect of a term of hard labor. Notwithstanding, this will be a bitter pill for any retiree who has planned retirement by utilising franking credits as a means of maintaining an independent existence.

Don't expect any sympathy from Shorten and his Labor colleagues - be advised, they are genuinely disinterested.

Sorry, Mike. I apologise. My last paragraph re paying tax should have been addressed to Philip Carman.

Philip said: "Those here exposing their disinterest in paying tax simply show how little they care for this country and its people and should hang their heads in shame – or leave." He also implies that people opposed to Labor poiicy are not only tax dodgers but Labor Party haters.

First, people receiving FC cash refunds are not dodging tax because the refund is calculated by the ATO according to the taxation law. if tax owed is greater than the FC amount, then it reduces the tax owed. If there is any FC amount remaining, then the balance is refunded as cash (just like PAYG refunds, already explained by others).

Second, when calculating taxable income, the franking credit is INCLUDED and the tax owed is calculated at the individual's marginal tax rate. If that is zero, then a refund is due (as others have already explained).

Third, as you will find if you read all the submissions to the Parliamentary Economics Committee Inquiry into the impacts of Labor's policy, you will find that many submittors are Labor supporters but are very worried about losing 30% of their income (which amounts ta a 30% tax rate). It is quite mystifying that Labor who claims to stand up for a fair go for all Australians would seek to impoverish elderly and probably infirm (some over 80) people at the same time as promising more tax cuts to wage-earners. Bear in mind that the current elderly paid taxes all their working lives, received fewer family benefit handouts had a TFT of $5400 or less in the Menzies era (not the generous $18200) and higher marginal tax rates. Now they pay GST. As for loyalty to Australia, some of these people may even be War veterans or at least made sacrifices during the war and post-war era, which was a time of much frugality. Frankly, it is an insult to call them tax dodgers and disloyal to this country.

Mike Peach: It seems that many have forgotten the reason for the cash refunds. And why there was bi-partisan support in 2000 when this was introduced.

Howard introduced the measure to compensate for GST impacts on low-income individuals. At the same time, he raised the Tax-free Threshold (TFT) to $6000 from $5400 where it had been for many years.

Please Google: 13 August 1998, Transcript pf the Prime Minister, the Hon John Howard MP Press conference - Parliament House for evidence.

Labor’s plan to end cash refunds is a lopsided measure because it only returns one section of the community to the pre-GST status. To be fair and impartial, if cash refunds are cancelled, THEN the TFT should be returned to $5,400. As it stands, Labor’s plan penalises one section of the community while another section enjoys the benefits of a $18,200 TFT. Labor raised the TFT from $6000 to $18200 in 2012/13.

The GST is a regressive tax that falls more heavily on people with lower incomes. It is still in force. Labor has failed to explain why the compensation for pensioners and low-income wage-earners, who pay large amounts of GST, is no longer needed, while at the same time continuing to reward wage-earners with a $18,200 tax-free bonus.

Interestingly, no-one in the media or elsewhere has asked this question.

Likewise, Labor's plan to end cash refunds is a regressive tax because it will hit low income self-funded-retirees and individuals while wealthier retirees and people with super in accumulation mode will be able to offset taxable income with their franking credits. as usual.

This is not about some people not paying tax, or a disinterest in paying tax, but about the fairness of Labor's policy, bearing in mind that an effective tax system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease.

Mike: if you think people who oppose Labor's policy are doing so because they don't want to pay tax-- and many of these are receiving less than the $18200 TFT-- then perhaps you also think that wage-earners enjoying the $18,200 TFT are also not paying their fair share of tax.

I would be very interested in your response to this idea.

If you own part of a company, you pay company tax - end of story. If those earnings are included with other income for tax purposes and that results in you paying more than the company rate for that portion then you should get the difference back, but not otherwise.

Can't recall anyone complaining about the lack of payment of imputation credits prior to the change. Not a peep.

I remember when pension income was first exempted from paying any tax, I thought wow this is great, never thought I'd see that happen - but when they went further with the payment of credits I nearly fell off my chair thinking this is too good to be true. It is, get used to it.

Invest in something else besides banks, utilities, reits etc. you'll be doing the economy a favour.

Yes there was. They were called the Vernon Inquiry and then the Campbell Inquiry. Lengthy, academically rigorous discussions that provided the framework that we now have in place. They argued the case strongly, clearly and effectively for a fully integrated personal and company tax system.

If you really believe that “you pay company tax - end of story” then presumably you want the entire imputation system scrapped. So someone on the top marginal rate only pays 30% on their income earned via share ownership.

No, didn’t think so.

Graham Hand I realise Cuffelinks has a big SMSF following so there’s an interest in keeping the audience happy and throwing them some red meat occasionally . But cherry picking a debate on the topic where the chap arguing for Labor’s franking policy is clearly out of his depth is not a good look if you’re looking to maintain at least some semblance of objectivity. Perhaps you’re not you’re not and that’s your prerogative as the editor but it detracts from the credibility of the publication, which I’ve enjoyed to this point.

"Any claim by non taxpayers is.."

They stick resolutely to their claim that shareholders are non-taxpayers while the tax office says:

"It is called an imputation system because the tax paid by a company may be imputed or attributed to the shareholders."

https://www.ato.gov.au/Forms/You-and-your-shares-2013-14/?page=5

"Imputed to shareholders" means shareholders are treated as if they themselves paid the company tax. So claims that shareholders are "non-taxpayers" are flagrantly denying that shareholders should be treated as if they themselves paid company tax and denying the tax office's definition of tax imputation to shareholders.

Interesting that some say Mr Tootel is closed minded, when they expose themselves as Labor haters to their core...
Those here exposing their disinterest in paying tax simply show how little they care for this country and its people and should hang their heads in shame - or leave. Dodging tax and then making (often very public) donations to worthy causes is just another form of controlling behaviour - deciding who/what is worthy of your money - and it's another very revealing tic. Personally, I would not want to do business with any of them and it tells us all much about those who refuse to submit to the control of institutions...unless THEY control those institutions. Trumpian or just plain self-centred or selfish?

To answer Philip Carmen, this is a discussion on a financial policy, not on whether one likes or dislikes a particular party. If the Libs were to introduce a similar policy I would contest it too. The point that Bowen tries to labour is that the self funded retiree has not paid the tax, but that the company has and so the self funded retiree does not have a legitimate claim to the rebate. But the company has reduced the amount it pays me and paid that to the tax office on my behalf. If my marginal tax rate is less than the company rate then too much tax has been paid on my behalf and a refund is due. It is the same as PAYE tax contributions on behalf of the employee by the employer. The employer pays a prescribed amount of tax to the ATO on behalf of the employee, and at the end of the year if the employee has a tax bill less than that which was paid on their behalf, the balance is refunded.

“ But the company has reduced the amount it pays me and paid that to the tax office on my behalf”

So why do we get so upset when Google, Apple and Amazon or any other company pays no company tax in Australia, if for those companies, there are so few Australian shareholder and likely to owned by shareholders on a zero tax rate as well? (particularly if they reside in low/no tax jurisdictions)

I imagine many would appose a zero % company tax rate and leave it to the individual shareholder to pay their tax.
I just don't believe company tax was set out to be anything other than a source of revenue to fund vital government services.

Lanzo, tax needs to be paid on all income. The issue is the rate of tax and how it's determined.

Even if there was a zero company tax rate, there should in my view still be a withholding tax charged to overseas shareholders so that they pay a form of income tax in Australia. We "get upset" as you put it when some multi-nationals don't pay tax in Australia because our policy doesn't give them a zero tax rate and they're often avoiding tax by structuring their affairs in a way that doesn't assign revenue and expenses appropriately. Overseas shareholders don't pay income tax in any other way in Australia, so we need either a company tax or a withholding tax regime to capture it.

That's a qualitatively different situation to domestic shareholders who do have obligations under income tax laws in Australia.

Lets hope there are not too many Alexander Tootels out there. He has no idea about franking credits and seems to have a closed mind on the subject yet is quite happy to claim past losses as a tax deduction.
Like Ian Frost I will be rearranging my finances so that I pay a very small percentage of my franking credits. My changes will not be beneficial to Australian Companies. It is disappointing that Labor is causing so much disruption at the expense of Australian companies for what I expect will be a very small portion of their projected revenue. Here comes the usual Labor budget blowout.

Graham: If others follow suit and withdraw from ASX equities, then this will drag the whole market down and all share investors will be hurt. This would be an unintended consequence of Labor's policy that could very well send the whole economy into decline.

Chris Bowen and others have suggested that those who will lose their cash refunds should seek to invest elsewhere e.g. REITS, property, overseas shares. But for elderly self-funded retirees, such options carry administrative and tax complexities that will only complicate their lives, and perhaps even greater risk than fully-franked Australian shares. And are very unlikely to deliver the same returns. As for adding children as SMSF members to consume the Franking credits, that is no good for retirees with no children.

Sadly, this debate may be "lively' but it is largely unintelligent and only adds to the confusion around the imputation system and the ramifications of Labor's plan on share investors.

The ALP has stated that the removal of franking credits cash refunds is not a new tax on self-managed superannuation funds (SMSFs) in pension phase because these funds do not pay any tax.

However, charities, funds and trade unions don’t pay tax either. So why have they been exempted from the policy and will continue to receive cash refunds while SMSFs in pension mode will lose their cash refunds?

Why don’t the same rules apply to those organisations as to SMSFS? And why aren't the changes being grandfathered like the negative gearing changes?

In speaking to National Press Club on 17 May 2018, Chris Bowen replied to this question from a journalist on the fairness of grandfathering negative rules:
“Your negative gearing changes are grandfathered meaning those who enjoy the benefits today enjoy the benefits forever; they’re largely baby boomers who enjoyed the growing economy every step of the way from free education all the way through to negative gearing with you. How is that fair?”

Bowen replied: "It's fair because those people have made investment decisions based on the rules at the time. Big investment decisions and we respect that."

Likewise, SMSF trustees who set up investments based on the existing franking rules also made “big investment decisions”.

So, can you kindly explain why Labor is not also respecting share investors’ decisions? What is the policy rationale for applying different rules for share investors and property investors? Why no grandfathering for franking policy? Why are unions and charities exempt but self-funded pensioners not? It just does not make good policy sense to treat one group of investors differently from another.

Labor policy to end cash refunds will particularly hurt low-income self-funded pensioners, especially women, whose annual incomes are below $60,000 p.a. With the current capital losses of a very volatile share market, a 30% cut in income will be disastrous and will drive their incomes to the level of, or even below, the Aged Pension, which Paul Keating calls an “anti-destitution payment”. Is this what Labor wants: to drive self-funded retirees who have saved all their working lives to provide a reasonable retirement living standard for themselves into poverty?

Labor needs to explain the policy rational for this unfair and discriminatory policy because it simply does not make sense to me. And it is contrary to Labor's "Fairness to ALL Australians" mantra.

Bowen's claim that this is needed for budget repair is questionable given Bill Shorten has announced his intention to give $8500 to negative gearers who rent their properties at 20% below market rate. This money will be taken from elderly self-funded pensioners and given to cashed-up property investors. This is the RORT!

The real shame is that no one is focussing on the reality that Labor won't save what it suggests it will. I wil sell my shares and move to REITs to preserve my income, albeit with increased risk, but the point is that the buyer of those shares will be an industry fund or high net worth individual, who will get the imputation credit, so no saving to the budget bottom line. I will be disrupted but the budget won't be any better off.

The saying “You can lead a horse to water, but you can’t make it drink”, comes to mind.