Don’t be fooled. The opposition to this policy is mostly vested interests doing what vested interests do. The focus on average Joannes snared by Labor’s wicked tax grab is just the opponents playing a good PR game – find an outlier likely to evoke sympathy and make her the face of the issue. But analysis released this week by the Parliamentary Budget Office makes it abundantly clear who is really affected by Labor’s proposal – and let’s be clear, it’s a well-heeled constituency. (Of course, everyone thinks they’re average, even when the data says otherwise). Labor’s policy is to retain the structure of the franking credit system but remove the cash refund of excess franking credits. Let me explain how it works.

Companies pay corporate tax on their profits, generally at a rate of 30 per cent. But if they return those profits to Australian shareholders in the form of dividends, the income becomes taxable at the shareholder’s marginal rate. It's not sustainable to have situation where most people over the age of 65 pay no tax, especially if they're objectively wealthy. If someone owns shares in their own name and they’re in, say, the 37 per cent tax bracket, they would get a credit of 30c in the dollar for the tax the company has already paid and would then have to pay an additional 7c in the dollar. If someone were in a lower tax bracket than 30 per cent, they would get any excess tax refunded so they’re only paying their marginal rate. For example, someone in the 19 per cent tax bracket would have a credit of 11c in the dollar that can be used to reduce their tax bill. This system was introduced by Paul Keating when he was Treasurer in 1987, to ensure the same money is not taxed twice – once at company level and then again in the hands of the shareholder.

But the Howard-Costello government went a step further and changed the system so the credits didn’t just extinguish your tax bill to zero, but any excess credits became a debt that the government needed to refund the taxpayer in cash. The only policy effect was to provide a fillip to well-heeled, greying voters - a nice bit of pork for the base. With encouragement from financial planners and accountants, many people in this demographic then structured their investments around the tax break. Baby Boomers set up DIY funds in their droves so they could ensure the fund invested to the hilt in Australian equities and raked in the refundable franking credits. Shadow Treasuer Chris Bowen (centre) is the architect of Labor's dividend imputation plan. Credit:Dominic Lorrimer Citing budget repair and intergenerational fairness, Labor is proposing to undo the Howard-Costello largesse.

Shareholders will still be able to use franking credits but only to decrease their personal tax liability to zero, not to send them into negative tax territory. It effectively means the government will retain some corporate tax no matter who owns the share. However, it is not double taxation as some people claim because there is still only one entity paying tax. There's an argument the corporate tax rate should be the minimum, which would end refunds for anyone with a marginal tax rate below 30 per cent. Labor is not going that far. Relying on PBO costings, Labor says its proposal would save the budget $11.4 billion over the forward estimates from 2018-19, and improve the budget bottom line by $59 billion over the medium term. Despite evidence to the contrary, critics are still running the line there’s a “black hole” in the projected tax revenue. This argument is based on the false assumption the PBO overlooked the new "balance transfer cap" rules limiting a super account to $1.6 million in pension mode and also likely behavioural changes such as re-calibrating investments or moving into a pooled super fund. The PBO has made it clear it took both these things into account.

So who is really affected? In 2014-2015, 1.13 million individual taxpayers claimed excess franking credits, according to the PBO. In other words, 92 per cent of taxpayers did not claim excess franking credits through their personal income tax return. And Labor has already promised to exempt pensioners. The other key group who claims franking credits are investors through their self-managed super funds (SMSFs). Super funds either pay tax at 15 per cent when in accumulation mode or zero when in pension mode, so SMSFs stand to lose out if they're already paying no tax and therefore can no longer use excess franking credits. But these SMSF members are not on Struggle Street. As the graphic shows, in 2014-2015 more than 80 per cent of excess franking credits claimed by SMSFs went to funds with balances above $1 million and more than half by funds with balances above $2.44 million, based on information provided by the PBO.

A typical example of the criticism from opponents to the policy was published recently by an outfit called SuperConcepts, which provides services to SMSFs. It argued Labor’s policy would “hit the lower end of retirees” - but its definition of a lower-end retiree is someone with $900,000 in an self-managed super fund at age 65. Loading SuperConcepts analysis points out that the closing balance after 20 years with the refundable credit would be $953,480 compared with $825,519 without the franking credit. That might be true but so what? For an 85-year-old to still have more than $800,000 in super puts them firmly in the upper echelon of household wealth. Successive governments have made it quite clear that the purpose of superannuation and the reason there are tax breaks for it, is to help people fund their retirement, not to provide a nice inheritance to their offspring. The average superannuation balance at the time of retirement (assumed to be age 60 to 64) in 2015-16 was $270,710 for men and $157,050 for women, according to the Association of Superannuation Funds of Australia. The median – usually more representative of a typical person – was lower still at $110,000 for men and $36,000 for women.

Someone with $900,000 in an SMSF is in no way a “lower-end” retiree. SuperConcepts described the person as drawing a pension of $45,000 a year from their pension, which might not sound luxurious. Bear in mind it's tax-free, they probably own heir home outright, and this is the minimum income, designed to preserve the fund balance, not their possible income. There’s a big difference between a person’s income and their wealth. If someone tries tell you that this policy will mainly hurt lower income earners, they’re technically right but they’re also trying to pull the wool over your eyes. Ditto if they emphasise taxable income rather than actual income, bearing in mind a pension from superannuation is tax-free. PBO documents show nearly half (48.8 per cent) of individuals who claim excess franking credits have a taxable income under $19,000 a year. But as shown in the graphic, ABS figures show households with a net worth of more than $1.97 million own 71.8 per cent of shares, with a further 14.3 per cent held by households worth between $1.29 million and $1.97 million.

Wilson complained this week that Labor’s policy would drive people to invest offshore and also to seek stocks with lower dividends or lesser tax burdens such as property trusts, but he didn’t make the case for why this a bad thing. Loading Investment experts have been telling us for years that most Australian investors are over-exposed to local equities. If someone is basing their investment decisions on a tax break then surely that’s the very definition of a market distortion. Tax policy never stands still and for beneficiaries of the current regime this was always too good to last. Labor's change is not a retrospective tax, as some have claimed, because it doesn’t seek to claw back franking credit refunds made over the past 18 years, and since shares are liquid, investors are free to change tack for future years. Correcting this absurd situation will be inconvenient, disruptive and perhaps even painful for some individuals. Nonetheless, it's the right thing to do.