Fundamentally, yes. Let’s back up and explain what dividend imputation is. It’s a system introduced by Paul Keating to ensure that company profits are taxed once, not twice. These days the corporate tax rate is 30 per cent, while individuals pay a stepped rate ranging from zero to 47 per cent. When an individual owns shares in a company they have to pay tax on the income at their own marginal rate. If their tax rate is higher than 30 per cent, they’ll pay the difference. If their personal rate is lower than 30 per cent, they’ll receive a credit. Former prime minister Paul Keating, who designed the original dividend imputation system as treasurer in the 1980s. Credit:AAP It also works for super funds, which pay tax at 15 per cent in accumulation phase or zero per cent in pension phase.

So far, so good. But in 2000, the Howard-Costello government, keen to return surplus to taxpayers, tweaked the dividend imputation system so shareholders could take their tax liability not just back to zero but into negative territory so the government owed them money. In other words, for some people, dividend imputation credits is money the government pays them for owning shares. It mostly benefits retirees who have low incomes but are rich in liquid assets, so they can draw down capital to supplement investment income, leaving them with plenty to live on. The Opposition is proposing to unwind the Howard-era reform so you can still use dividend imputation credits to reduce your tax to zero, but not below. This meets the basic logic test. People who pay income tax can claim deductions to reduce their taxable income but the least amount of tax you can pay on ordinary income is zero. Why should dividend income be different? Critics will argue that the Opposition is having it both ways since if people pay the difference between marginal rate and company rate, they should also be refunded the difference between their marginal rate and the company rate. If someone is on a tax rate of zero and they don’t receive a full credit, they’re effectively paying tax.

Perhaps that’s true but it’s also reasonable. Everyone pays goods and services tax, and if someone owns shares it’s fair enough they should indirectly pay some residual corporate tax. Costello and Howard The Howard-Costello largesse is now unsustainable. We have a tax system that can no longer pay for all the services that older people have been accustomed to all their lives. The deficit in 2017-18 is estimated to be $24 billion. It’s unreasonable to expect working people – many of whom can’t afford their own home - to shoulder the entire burden of budget repair. It’s also about intragenerational fairness, since it overwhelmingly affects well-off retirees, not all older people.

Sure, it’s difficult to recalibrate your investment portfolio after retirement but it’s possible. It particularly pains me to see case studies of retirees potentially devastated by this proposal because they have 100 per cent of their savings in Australian dividend-paying shares. Not because I feel sorry for them, but because it’s silly. First, it’s foolish to build an investment strategy around a tax perk – that’s classic tail wagging the dog. Second, it’s not a well-diversified portfolio so there’s market risk. The fact we have so many retirees chasing fully franked dividends – where there’s a full credit because the company has paid the full rate of tax - is a huge distortion for the sharemarket. It means an excessive amount of money flows into the stocks of the big banks and Telstra. There are many vested interests who cry foul over the proposals, but there are those in the investment world who acknowledge the status quo is far too generous. Gareth Brown at Forager Funds wrote a blog post this week arguing the corporate tax rate of 30 per cent should in fact be the minimum - which is harsher than what Labor is planning. He argues it's fairer for the full profit stream of companies to be taxed, including the component distributed to shareholders.

Interestingly the Labor proposal doesn’t really affect pooled super funds – that is, the big industry and retail funds most people are members of. They have enough members paying tax to make the full use of all franking credits. Loading While the measure is aimed at well-off retirees, it catches some part pensioners and a very small number of full pensioners. Opposition Leader Bill Shorten hinted at some sort of compensation scheme for pensioners, before concluding that “we will make sure that pensioners are OK, full stop”. My sources suggest a specific scheme is off the mark but there’ll be further announcements closer to the election to make sure pensioners are better off overall under a Labor government than a Coalition one. Put together with CGT and negative gearing reforms, Labor is building a war chest so it’s a case of watch this space.