It’s been credited with destroying the Labor party’s election chances in 2019, but a controversial franking credits policy dubbed the “retiree tax” could be back on the table to fund the government’s huge stimulus packages.
Unions have in recent days called for the government to consider tweaking its franking credits policy to fund the $189 billion it will spend stimulating and protecting the Australian economy from the coronavirus pandemic fallout, while high-profile fund managers have also noted a change in policy may be required.
What are franking credits? The policy, explained
The current franking credits policy costs the budget around $5 billion a year, a potential expense that could be reined in to offset the huge stimulus spending.
Wait - what are franking credits?
Franking credits work as an “I owe you” given to investors by the government. They’re an acknowledgement to the investor that tax has already been paid on their investment income, in the form of company tax, and is a promise that when it’s tax time, the investor will see that tax offset.
This system is called dividend imputation, and is designed to stop investment income being taxed twice at both the company and individual level.
The system runs into a problem when individuals don’t have a taxable income, for example, if you’re a retiree. In a bid to address this, the Howard government in 2001 allowed investors without a taxable income to receive cash refunds instead of a tax offset. Australia is one of few countries with this system.
Calls to change system
"If this [stimulus] is going to be paid for it's got to be fairly paid for by everyone," Australian Council of Trade Unions secretary Sally McManus told Radio National on Thursday.
"I think we've got to seriously look at some of the tax loopholes that everyone was too scared to look at in the election, like franking credits."
The Labor party went to the 2019 election with a plan to change the franking credits cash refunds policy.
They claimed it was inequitable and called for cash refunds on franking credits to be abolished, unless investors were receiving a full- or part-pension.
Fund manager Geoff Wilson, led industry arguments against changes to franking credits, but has also shifted stance, noting the government will spend around 10.6 per cent of GDP over the coming six months.
“Someone has to pay for that, whether it’s higher taxes later on. It has to be paid for at some point in the future at some point in time. Where should that money come from?” Wilson said last week in an address to Wilson Asset Management investors.
He said he assumes “everything would be on the table” including changes to franking credits.
“Our major concern with franking was the inequitable nature of the Labor proposal where you could have five individuals that were all the same age in retirement and getting five different outcomes,” Wilson said.
“All we hope is, if anything is done, it is done equitably, fairly and logically.”
Modelling performed last year found abolishing cash refunds would boost the budget by $10.7 billion, and the average sting for retirees would be $489 a year, or 0.5 per cent of recipients’ disposable income. The modelling also found no recipient in the bottom half of the income bracket would be worse-off.
The Liberal party claimed the policy amounted to class warfare and branded it the “retiree tax”, while other modelling found the Howard-era policy is preferable as it takes pressure off taxpayers to fund retirees.
Speaking recently, Wilson suggested capping the amount retirees receive in cash refunds would help make the system “more equitable” while protecting lower-income retirees, the Sydney Morning Herald reported.
Treasurer Josh Frydenberg has, however, poured cold water over the calls, claiming the government is not considering changes to the policy.
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