Franking credits review on cards: tax expert

Government may need to review its policy on refundable franking credits, says KPMG.

The Morrison Government may have to review its policy on refundable franking credits or consider spending cuts or an increase in the GST, according to major consultancy KPMG.

While Labor’s plan to close down the concession that gives cash refunds for excess dividend imputation credits, branded a “retiree tax”, was partly blamed for its shock loss on Saturday, KPMG tax specialist Damian Ryan said the treatment of the issue throughout the election campaign only clouded the reality.

“What was lost in much of the election discussion around the removal of the refund of franking credits for individuals and superannuation funds, was the tax policy issue that is trying to be addressed,” he said. “As the Australian population ages, and as more shares are held by retired Australian individuals and superannuation funds with a significant proportion of members in pension phase, a significant part of the corporate tax base is refunded, thereby putting a strain on the country’s tax base.

“Assuming that the current situation of refundable franking credits continues, then Australia will continue to refund part of its corporate tax base.

“The other alternatives are to accept the reduced tax base and correct spending accordingly, or to revisit the tax base, including consumption taxes, which is just as politically difficult.”

Franking credits were introduced by the Hawke/Keating Government in 1987 to stop shareholders being taxed twice on company profits. Cash refunds for unused credits were introduced by the Howard Government in 2001 and cost $550 million. In 2014, according to the Parliamentary Budget Office (PBO), they cost $6 billion and its estimates they will cost $8 billion per year in the next few years.

“During the election campaign, on one side, refundable franking offsets were described as a tax rort by the big end of town,” Mr Ryan said. “On the other side, providing an offset but not a refund was described as a new tax on retirees. In reality, neither description is accurate.

“In Australia, income tax is levied at a company level. To avoid double taxation of the profits, we have a system of dividend imputation. When a company pays a dividend, it attaches a franking credit, being a credit for the tax paid by the company on that profit.

“When received by a shareholder, the shareholder receives a tax offset for the tax paid at the company level. Where an individual’s rate of tax is less than the corporate rate of tax, the excess franking offset is used to offset the tax liability on other income.

“Where the franking offset exceeds the tax liability, the excess is a refundable credit. To state the obvious, where the excess is refunded, the Federal Government is refunding part of the corporate tax base. This is not necessarily wrong. It is, however, a tax policy choice, with longer-term implications for the stability of the revenue base.”

An analysis by the PBO found that 53 per cent of excess franking credits claimed by self-managed super funds (SMSFs) were to funds with more than $2.44 million in assets. Funds with more than $1 million claimed 82 per cent of the franking credits, worth $2.1 billion a year, The Australian reports.

Mr Ryan said: “The policy issue, is whether income tax at a corporate level is a tax in itself, or rather a prepayment of tax, with the ultimate level of tax dependent upon the tax profile of the individual and the superannuation fund.

“Either position is defendable from a tax policy perspective, but it comes with fiscal consequences.”

Are you concerned that the Government may have to review the current franking credits policy? Did you believe the issue was done and dusted after the Government was re-elected?

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