With an election year coming up in 2019 and the possibility of a new government should Labour win, it is worth being aware of what tax changes may occur on a change in government.
Bill Shorten has made it clear in his policies that franking credits refunds may be in jeopardy under a Labour government. For those of you who are not sure what this means and what effect it might have, please read on.
Franking credits represent the tax that has been paid by a company before it pays out dividends to shareholders. If a company makes $100 in profit, it will pay tax of around $27.50 – $30 on the income (for the sake of this example we will assume $30). The $70 leftover is then declared as a dividend to its shareholders. The amount of tax that the shareholder pays on this dividend, if any, depends on what level of tax they are on. The effect of Labour’s change in treatment of franking credits so they do not give rise to a refund, will also depend on what tax rate the recipient is on. The effects can be seen below.
If you are an individual taxpayer on the highest tax bracket (ie 47% including medicare levy) the $70 dividend received will give rise to the “top up” tax of $17 to bring the total tax paid up to $47 (ie $30 at company level and $17 at individual level). The Labour government measures will have no effect on this scenario as there is still extra tax to pay, not a refund of excess franking credits.
If you are an individual taxpayer with your total income, including dividends and franking credits below $18,200 (so you are non taxable), the $70 dividend received would currently give rise to a refund 0f $30. With Labour’s planned new laws this refund would not be paid back to the shareholder, so the return on those shares would then only be $70, not the total of $100 that is received under the current law.
For individuals with incomes between the highest tax rate (ie 47%) and the lowest rate (ie 0%) the effect will depend on the tax rates (the tax rates range between 21% and 39% between income levels of $18,200 and $180,000). If the tax rate is below the franking credit rate of 30% then there may currently be a refund of the excess franking credit. This would be lost under potential Labour government plans. If the tax rate is above the franking credit rate of 30% then there will still be “top up” tax to be paid and this will be exactly the same under the intended Labour government plans.
The main effect of potential Labour changes is to self managed superfunds (SMSF’s). If your SMSF is in pension mode, where there is no tax on the income, any excess franking credits would be lost. As mentioned above, all other things being equal, this will mean the return that the fund will make on its investments will be 70% of what it would normally be under the current law. If the SMSF is in accumulation mode, where the tax rate on income is 15%, there is potential for loss of the refund of excess franking credits, depending on the other income earnt by the fund that might be taxable which could be used to offset against the excess franking credits.
If Labour do take office next year then there will be a need to review investment strategies for portfolios in individual and SMSF hands, to ensure lost excess franking credits are minimised if possible, as long as the strategy fits in with long term investment goals and needs.
There is not really anything to be done right now, other than be aware of the potential changes and be prepared for the changes that may come about should Labour win power.
Any queries in relation to the above, don’t hesitate to contact your client manager to discuss.
Kreston Stanley Williamson Team
*Correct as of November 2018
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.