Posted on 14 March 2019
The Australian Labour Party has advised its intention to amend the current dividend imputation system to make excess imputation credits non-refundable from 1 July 2019. The policy announcement if implemented could have a significant impact on retirement incomes by reducing cash refunds for excess imputation credits and impacting returns on superannuation savings.
Under the current system where a taxpayer receives franked dividends, they are able to use the attached imputation credits which represent tax already paid by the company, to offset any tax payable on the dividends in their hands. This ensures that shareholders are not subject to double taxation and only pay tax on company profits at their relevant rate.
Where a shareholder’s tax rate is less than the company tax rate, any excess imputation credits can be used to offset tax liabilities on other taxable income such as salary and wages. This also means that where the value of the shareholders imputation credits exceed their total tax liabilities, they are entitled to a cash refund for the amount of excess.
Depending on the individuals circumstances, these cash refunds can make up a significant proportion of the return they receive on their share investments and on the level of income they are able to generate in retirement.
The ALP confirmed their proposed changes would apply to all individuals and super funds and that only certain bodies would be exempt. These include:
- ATO endorsed income tax exempt charities
- Not for profit institutions with deductible gift recipient status
- Individuals that are ‘pension or allowance recipients’ and
- SMSF super funds with at least one ‘pensioner or allowance recipient’.
The outcome if the ALP gets in and the proposed changes go ahead will be that for those whose tax liability is greater than the franking credits to which they would be entitled, they will not be affected. Those who will be hardest hit are those retirees or individuals who currently pay little or no tax, as they will no longer be able to claim a refund of excess franking credits, thereby limiting the actual cash return they have until now been able to receive on their equity investments.