Bill Shorten will promise to end cash refunds for excess imputation credits for individuals and superannuation funds in a sweeping crackdown saving $11.4bn over the forward estimates.

In a shift that will be met with fierce resistance from investors and Australia’s self-managed super funds, Labor will shut down an extension of the dividend imputation scheme created by John Howard and Peter Costello, and restore the system to the original design, implemented by Paul Keating in the late 1980s.

Keating introduced dividend imputation in 1987 to prevent the double taxation of dividends, once as company profits and once as personal income, and the Howard government then enhanced the scheme by allowing individuals and super funds to claim cash refunds for any excess imputation credits not used to offset their tax liabilities.

Q&A What is a dividend imputation? Show When companies pay dividends to Australia​n​ shareholders out of after-tax profit, shareholders receive franking credits​,​ a credit against their own tax​ ​bill based on the tax paid by the company. This system,​ which is ​known as​"​dividend imputation​", is unusual – only ​four other countries in the world use it.



However, in 2000​ ​the then treasurer, Peter​ Costello, made the system even more generous to shareholders by allowing them to claim a cash refund if they received more in franking credits than they owe​d ​in tax. Because income from superannuation is tax free for people over 60, high​-income retirees can use franking credits to get a cash "refund" of​ ​more than 40 cents for every dollar they receive in dividends.



The cash payments cost the budget $550m the first year they were paid. The ATO estimates that​ ​the measure cost $4.6​bn​ in 2012-13, and Labor claim​s that abolishing the payments​ ​from 2019​ ​will save $8bn a year.



In a speech in Sydney on Tuesday, Shorten will characterise the current arrangements as “unsustainable largesse for high-income earners”, which, if left unchecked, will cost the budget “$8bn every single year”.

Shorten will argue the Howard government’s extension of the scheme “entirely distorts the original design of the dividend imputation system” and has left Australia as the only country in the OECD with a fully refundable dividend imputation credit system.

The crackdown, commencing on 1 July 2019 if Labor wins the next federal election, would affect about 8% of taxpayers and about 200,000 self-managed super funds, and will likely spark a substantial backlash from wealthy retirees and the politically influential super lobby.

The measure is a revenue bonanza for an opposition that has already made big commitments in education, welfare and health – clawing back $11bn in two years, with the estimated medium-term saving of $59bn.

While likely to generate considerable political noise, the policy shift will give Labor room to move on personal income tax cuts, which the Turnbull government is signalling it will offer in the lead-up to the next election as a salve to persistent low wages growth.

It also opens scope for a halfway house on company tax cuts. Fiscally, Tuesday’s shift would give Labor the option of offering tax relief to firms prepared to increase investment onshore, or give their workers a wage increase.

Labor argues the closing of the Howard concession on dividend imputation is necessary because of the drain on the budget, and because the generosity of the arrangements distorts the investment decisions of self-managed super funds since there is a strong incentive to maximise imputation credit cash refunds, rather than diversify holdings.

According to Labor’s policy documents, some self-managed super funds are claiming cash refunds of up to $2.5m under current arrangements.

Analysis by the Parliamentary Budget Office says the top 1% of self-managed funds claimed, on average, cash refunds of $83,000 in 2014-15.

Shorten will argue on Tuesday that the current policy settings were put in place when there were budget surpluses of close to 1% of gross domestic product, and when the estimated cost of the Howard and Costello policy was $550m per year.

In an attempt to minimise the backlash, Shorten will promise to keep dividend imputation. “Labor created dividend imputation, we understand its value and we will maintain it,” the Labor leader will say.

He will argue that Australians will continue to be able to use imputation credits to reduce their tax liabilities, “but not to claim cash refunds”.

The Labor leader will argue “this change only affects a very small number of shareholders who currently have no tax liability and use their imputation credits to receive a cash refund”.

He says people hit by the policy change will not pay any additional tax, they will just not get the cash bonus currently claimed.

“Every dollar that slips through these loopholes is a dollar that cannot be invested in the Australian people and their potential,” Shorten will say. “Every dollar allocated to tidy little arrangements for people who already have millions of dollars is a dollar that can’t be used to repair the budget and bring Australia back to surplus.

“And every dollar our opponents spend on preserving exemptions for the top end of town is a dollar they have to cut from schools and hospitals, extracted from middle Australia in tax increases or forcing taxpayers to pay more interest on the nation’s debt.”

Labor has already announced assertively progressive tax measures, such as changes to negative gearing and capital gains tax, and taxing distributions from family trusts at 30%.

