The Australian businessman says he’s ‘so horrified’ by his cash rebate amount and wants the scheme means-tested

This article is more than 1 year old

This article is more than 1 year old

The Australian businessman Dick Smith has called for the franking credits system to be reformed after revealing he was once handed $500,000 in cash rebates in a single year.

When Smith was told he would soon receive what he called “ridiculous money”, he complained to the tax office and requested that the agency close down his self-managed super fund.

But he said he was told superannuation rules prevented it from shutting the fund – and therefore stopping him from getting the cash rebates.

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“They said to me we were going to get a $500,000 refund,” he told Guardian Australia. “I was so horrified.”

Smith’s call for reform comes as Labor considers the future of its contentious election policy to abolish cash rebates for people with excess franking credits.

The Coalition labelled the policy a “retiree tax”, a claim strongly disputed by experts, while the Labor leader, Anthony Albanese, has conceded it was a drag on the party’s campaign.

Smith first revealed the windfall to the Sydney Morning Herald, telling the paper the scheme should be means-tested and that it was “outrageous” the wealthy were “getting money from the government”.

Q&A What are franking credits? Show Hide A franking credit is an entitlement to a reduction in personal income tax payable to the Australian Taxation Office. The entitlement is offered to individuals who own shares in a company in recognition of the tax on profits paid by that company. It is attached to a dividend which the company pays to shareholders out of its after-tax profits. The value of the franking credit is equivalent to the tax paid on the individual’s share of the company profit before it was distributed as a dividend. The rationale for the credit is to avoid double taxation. Because the company has already paid tax on the dividend, the accompanying franking credit reduces tax payable by the individual on their total taxable income. If a company is paying the full 30% company tax rate, a “fully franked” dividend of 70 cents per share will be accompanied by a franking credit of 30 cents per share, representing the tax that the company has paid on its $1 per share of pre-tax profits. Franking credits are only available to Australian residents. Historically, the ATO did not refund individuals with cash for any franking credits in excess of their tax payable, but this was changed by the Howard government in 2000 to allow individuals to receive cash refunds even if they do not pay any personal income tax.

He said his accountants had told him to set up the super fund, but he demanded they wind it up after he learned of the impending $500,000 windfall in 2016-17.

In November 2017 he wrote to the tax office commissioner, Chris Jordan, asking for the agency to intervene after his accountants said they could not close the fund.

Jordan thanked the entrepreneur for his “unusual request”, saying he had never had someone ask him “to pay more tax”.

But the tax office later wrote back to Smith telling him rules around market-linked pensions prevented the agency from winding up his super fund.

“As the regulator of self-managed superannuation funds I am compelled to administer the superannuation rules as stated and I am unable to intervene further in the circumstances you have outlined,” the deputy commissioner of superannuation, James O’Halloran, wrote.

Smith said he went on to receive $250,000 in franking credit cash rebates in 2017-18.

He told Guardian Australia the fund remained open but claimed his accountants had structured his tax affairs so he paid at least $1m in tax and $1m to charity each year.

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He suggested Labor had failed to sell its franking credits policy and should have introduced a threshold so that any changes only impacted the wealthy and not the “less well off”.

Smith alluded to the issue last year when he told a Dark and Dangerous Thoughts event held by Hobart’s Museum of Old and New Art that it was unfair he was able to save $500,000 a year via his super fund.

Pensioners were already exempted from the Labor policy, which would have eventually saved the budget about $8bn a year.

An Australian Council of Social Service briefing paper says a person or self-managed super fund losing $10,000 a year in refunded imputation credits would hold around $500,000 in shares (50 times the value of foregone franking credits).

Under dividend imputation, shareholders receive franking credits on the company tax paid on share dividends which can then be used to reduce a person’s tax. Howard government changes extended the scheme to allow people to receive cash rebates.

Albanese has already hinted that Labor’s franking credits policy might have been improved if it was capped or grandfathered. The second option would slash the revenue the reform might raise, which Labor had banked to amass an election-spending war chest.