When a company makes a profit it pays the 30 per cent company tax rate on that profit. In most countries, after the company pays tax it distributes dividends to its shareholders who, in turn, pay at least some personal income tax on those dividends. But Paul Keating thought that companies and shareholders paying tax was "double taxation", so in 1987 he introduced "dividend imputation credits", which simply meant that any tax paid by the company could be "credited" against any personal income tax payable.

The franking credit is essentially a note that comes with the dividends that says company tax has already been paid on the dividend, giving you a discount on that income at tax time.

Whether Paul Keating’s system of dividend imputation is "fair" or not has never been widely debated in Australia for the simple reason that so few people understand how it works. But what really does not pass the fairness pub test was Peter Costello’s subsequent decision to allow people with "spare" tax credits to swap them for cash.

Before you can understand the full horror of Costello’s changes it is important to remember that he also made income from superannuation funds entirely tax free once you turn 60. That is, if you are over 60 with $10 or $20 million in superannuation, you could literally withdraw millions of dollars per year and pay not a single cent in tax on it. Paying no tax would mean tax deduction credits would be of no use. For example, a very wealthy individual drawing $1 million per year from their superannuation and paying no tax – not even the Medicare surcharge – who received say a $10,000 dividend cheque that comes with $3000 worth of "tax credits". Now imagine the frustration of our retired millionaire who, because they pay no tax, has nothing to offset their credits against.

Luckily for them, Peter Costello changed the law in 2000 to allow any surplus credits to be swapped for cash meaning that rather than paying no tax, they get paid $3000 by the taxpayer.