Proposed franking credit changes: the news

In mid-March 2018 the Leader of the Opposition, Bill Shorten, announced what he termed ‘the next stage of Labor's plan for a fairer tax system’, proposing the abolishment of franking credit refunds.
In late March 2018 Mr Shorten announced amendments to the original announcement via a Pensioner Guarantee – protecting pensioners from changes to excess dividend imputation credits. In September the Treasurer, the Hon Josh Frydenberg MP, asked the House of Representatives Standing Committee on Economics to inquire into the implications of removing refundable franking credits.

It is important to note that the proposed franking credit change is simply a proposal by the Opposition at this stage.

Based on what is currently expected, QSuper accounts will not be affected by this proposal.

Below are answers to some common questions.

  What is a franking credit?

Put simply, a franking credit is a tax credit that can be attached to dividends paid to shareholders. Franking credits are designed to offset the income tax already paid by the company, and the intention is for the shareholder to pay their own individual rate of tax on the profits instead. The aim is to prevent double taxation (i.e. paying tax twice on the same income). Read more about franking credits.

 What is the current proposal?

The Leader of the Opposition, Bill Shorten, has proposed abolishing franking credit refunds. It is important to note that he is not proposing to abolish franking credits, but simply preventing investors from claiming a cash refund from franking credits that they cannot offset against income tax.

An exception to this will be those who the Labor government terms “pensioners,” who will still be able to access cash refunds from excess dividend imputation credits.

Under the Pensioner Guarantee, every recipient of an Australian Government pension or allowance (including Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance) with individual shareholdings will be protected from the abolition of cash refunds for excess franking credits. Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

 I have a Standard Income account with QSuper and that account doesn’t attract income tax.

Will I be impacted?

No. The proposal impacts taxpayers who haven’t paid any tax. Because QSuper pays tax each year, based on what is currently known this proposal is unlikely to impact QSuper or our members. Even if your income account is not paying income tax, QSuper is a taxpayer and can take full advantage of the franking credit.

Will I lose any franking credit benefits?

No. QSuper will still receive the benefit of franking credits when determining unit prices. Remember the proposal is not changing franking credits, rather stopping a cash refund for those who haven’t paid tax.

I have Self-invest. Will I be impacted?

No, for the same reasons as above, QSuper is a taxpayer.

 If I don’t pay any taxes personally, will I be impacted by the change?

Your QSuper account is unlikely to be impacted by the proposal, however if you have investments outside of super and do not qualify for the proposed ‘Pensioner Guarantee’, you may be impacted. Speak to a financial professional, such as a financial adviser or accountant to find out more.

 If this proposal became law, would it affect any Transfer Bonus I might receive in the future when I retire and commence a standard Income account.

No, this bonus reflects a tax saving from money which has been set aside by the fund to pay capital gains tax on assets when they are sold at a profit in the Accumulation or Transition to Retirement (TTR) account but is not required to be paid when the assets are sold in the Income account. It is not affected by this proposal.
Learn more about QSuper’s innovative Income account Transfer Bonus.

 Who may be affected?

For self-funded retirees who own shares outside of super and do not qualify for the proposed ‘Pensioner Guarantee’, these cash refunds could be a part of their retirement income strategy. The proposal could mean they lose a portion of their income.

Likewise, some self-managed super funds (SMSFs) may hold a large portion of assets in the pension phase, which generally attracts a nil rate of earnings tax. If these SMSFs have little or no other income tax expenses (for example, from contributions tax), they could lose the cash refund from unused franking credits, which could diminish the overall return of the SMSF.

It is also important to note that SMSFs in accumulation phase could be affected if a large portion of its assessable income is derived from fully franked dividends, as earnings in a super fund are taxed up to 15% compared to a franking credit tax offset of 30% received on a fully franked dividend.

Under the proposed ‘Pensioner Guarantee’, any SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will still be able to benefit from the refund of franking credits.

QSuper will keep members updated on any future development of this proposal. In the meantime you can contact QSuper with any questions.