Labor has acknowledged its new policy ending cash refunds for excess dividend imputation credits will affect 14,000 full pensioners and 200,000 part-pensioners, but said it was necessary because current arrangements were fiscally unsustainable.



While quantifying the number of pensioners affected, the shadow treasurer Chris Bowen told the ABC on Tuesday night he couldn’t provide an average level of income for people affected by the proposal outlined earlier in the day because “the situation would vary”.

Bowen acknowledged there would be a substantial political backlash to the change, which reverses a policy implemented 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.

He said the change was “difficult, but we’re going to the election upfront”.

“People will continue to receive their dividends and dividend imputation. They’ll continue to receive those franking credits and they won’t be paying tax,” the shadow treasurer said.

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.



The proposed policy shift, which raises more than $11bn over the forward estimates, and $59bn over 10 years, creates fiscal room for Labor to offer voters tax cuts at the next federal election, in essence matching the Turnbull government, which has already signalled its intention to go down that route.

Labor leader Bill Shorten was blunt about that potential on Tuesday, telling reporters it would allow the opposition “the option of offering tax relief to low- and middle-income Australians before the next election”.

Bowen’s defence of the policy on Tuesday night followed a blunt warning by the chief executive of the Self Managed Superannuation Funds Association, John Maroney, that the proposed shift would whack “more than one million Australians saving for their retirement and other purposes”.

Labor was braced for outrage from the politically influential self-managed super industry and self-funded retirees, and it materialised from the moment the policy was launched on Tuesday.

While industry super funds were sanguine about the proposal, Maroney said: “Our calculations show it will cut about $5,000 of income from the median SMSF retiree earning about $50,000 a year in pension income”.

“To be saying these people won’t be paying any more tax is just semantics,” he said.

“This hit on retirement incomes clearly is not just affecting the very wealthy and can substantially damage the lifestyles of retirees who have prudently saved and are carefully drawing down on their retirement savings”.

“Viewing all SMSFs as belonging to the mega-rich is an over simplification.”

The Turnbull government picked up the theme. The treasurer Scott Morrison said 97% of people claiming the cash refunds had an income of $87,000 or less.

Morrison said the proposal Labor had advanced would allow high income earners with shareholdings to access the full value of franking credits, but part pensioners and self-funded retirees would not. “It cannot be fair that someone who’s on a low income cannot be given the full value of the franking dividend that someone on a higher income can,” Morrison told Sky News.

The former Liberal party leader John Hewson backed Labor’s proposal, but he expressed surprised that there were no grandfathering arrangements to protect people who had structured their investments and retirement income streams under the current rules.

In giving in-principle endorsement, Hewson said a key element of tax reform was a careful examination of tax concessions. “If you look at the history of this one, where did it come from?

“It came from a decision in the Howard government when they were going to tax trusts and the sweetener was to give a cash refund on these imputation credits,” Hewson said. “Howard decided not to tax trusts but left the sweetener at a time when the budget was flush with money.

“If the income we are looking at is $87,000, how much do people have in assets to earn $87,000? A million to a million-and-a-half in assets? There is an equity dimension to this.”