Paul Keating has backed Bill Shorten’s overhaul of dividend imputation, saying the system the Labor leader proposes mirrors the original framework he set down in the late 1980s.

The former Labor prime minister, who was consulted before Tuesday’s public announcement, told Guardian Australia the new scheme outlined by Shorten ensured company income was not taxed twice.

Shorten has committed to axe cash refunds for excess imputation credits paid to individuals and superannuation funds.

“The Labor party is returning the imputation system to the framework I designed in 1987,” Keating said. “This did not include cashbacks for people whose average tax rate was below the corporation tax rate of 30%.”

“The key thing is to make certain that company income is not taxed twice. That’s the key thing, and the key to that is keeping the imputation system.

“The Labor party is committed to keeping the imputation system.”

On Tuesday Shorten also unveiled a new tax write-off for businesses investing locally in machinery, plant and equipment, or in intangibles such as patents or copyright.

The new depreciation arrangements will reward businesses prepared to invest in Australia with generous write-off provisions, allowing an immediate 20% deduction of any new eligible asset worth more than $20,000.

The overhaul of dividend imputation – which will stop cash refunds for excess imputation credits for individuals and superannuation funds – will save $11.4bn over the forward estimates.

The new proposal from Labor reverses a change made to Keating’s policy by John Howard and Peter Costello allowing individuals and super funds to claim cash refunds for any excess imputation credits not used to offset their tax liabilities.

After unveiling the two measures, Shorten said Labor was creating fiscal room to offer voters tax relief as well as funding a range of social services. But the government went to war immediately, declaring that the ALP was intent on “stealing” the tax refunds of pensioners and retirees.

“That’s what they are doing today,” the treasurer, Scott Morrison, told reporters, referring to the proposal to end refunds for excess imputation credits.

“They can dress it up anyway they choose, but that is the brutal reality of what the Labor party have decided to do today.”

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.



Morrison said Labor was chasing revenue because it had lost control of spending, and the dividend imputation measure was not about fairness. It was instead “a brutal tax grab”.

The Association of Superannuation Funds of Australia was also critical, arguing that the removal of refunds for dividend imputation credits would hit low-income retirees inside and outside the superannuation system.

“If there is a concern about individuals with large retirement savings receiving the benefit of refundable imputation credits then this would be better addressed by measures more closely linked to retirement balance,” said the association’s chief executive, Martin Fahy.

“At face value, it appears that this proposal would impact mum and dad investors both through their superannuation and through the shares they own outside of super, and compromise the longstanding investment neutrality principle.”

The government said far from Labor’s policy being a hit on wealthy retirees, 97% of people who received franking credit refunds had a taxable income below $87,000, and more than half of them had a taxable income below the tax-free threshold.

It said the Shorten proposal would hit the incomes of a million Australians, most of whom were over 65.

The government said the change would affect one in three self-managed super funds, affecting 370,000 member accounts and the retirement savings held in about 3.5m super fund accounts.

Shorten told reporters after his speech he had anticipated the vigorous pushback from both the government and self-managed super funds, but he said the two measures were building blocks in the opposition’s economic platform.

The opposition leader said ending cash refunds in the dividend imputation system was about making the tax system more equitable as well as creating fiscal room for a tax cut for working people – with the measure saving the budget more than $11bn in two years, and $59bn over the medium term.

The enhanced depreciation arrangements for businesses investing locally was a measure to boost economic growth, he said. “We’re choosing to invest in Australian business so that they invest in growth,” Shorten told reporters.

Asked whether ending the cash refunds amounted to stealing from pensioners, he said: “That’s just complete rubbish. What we’re doing is reforming the tax system.

“I think all fair-minded observers of Australia’s tax system know that the current tax system has advantages in it which are weighted to the very wealthy and to large corporations. What we want to do is put the weight back in the economy and government to looking after middle- and working-class Australians.”

The shadow treasurer, Chris Bowen, said the change would affect less than 1% of people on the pension, and 8% of taxpayers overall.