The question of cost
Labor announced over a year ago that it plans to scrap cash refunds on excess dividend imputation credits, with exceptions for pensioners.
The costings of the policy have been a heated source of debate. On several occasions, Mr Bowen has used the comparison of a nurse and a retired shareholder to highlight the inequitable scenario in a bid to sell the proposal to end cash refunds for excess dividend imputation credits.
“A nurse who earns $67,000 a year, we charge $13,000 in tax. But a retired shareholder who has $67,000 in income, we charge her zero tax and then write her a cheque for $27,000. That is not OK,” Mr Bowen said.
However, tax experts – like Robyn Jacobson from Tax Banter – have pulled apart these numbers and found they don't stack up.
“Assuming that the income of $67,000 to which Mr Bowen refers is the taxable income – that is, the shareholder has the same taxable income as the nurse – then this includes the dividend grossed up for the franking credit, suggesting that the dividend (actual cash received) is $40,000 and the franking credit (notional assessable income) is $27,000,” she said.
“However, this means that the franking rate applying to the dividend is just over 40 per cent, which is not possible under the imputation rules.”
Further, the refundable amount doesn't add up on the basis of these figures.
“The income tax the shareholder pays on the taxable income of $67,000 – before the franking credit is applied – is $14,132, including the Medicare levy and the LMITO of $530 (same as the nurse),” said Ms Jacobson.
“Then the franking credit of $27,000 is applied, which reduces the tax payable to zero and produces an excess franking credit of $12,868. The amount refunded to the shareholder is the excess franking credit of $12,868, not the entire amount of the $27,000 franking credit,” she said.
Clarity from Bowen
Mr Bowen has since released a new set of figures that clarify context.
According to Mr Bowen’s new figures, the refundable tax offset, representing the refundable franking credit, is $28,700, not $27,000, based on a grossed-up dividend of $95,667 (i.e. cash dividend of $66,967.90). Using a yield of 5 per cent, this is a capital base of $1,339,333.
In simple terms: the new figures stack up better, and experts like Ms Jacobson accept they are more on message than the original set.
Calls for calm
Big-name fund managers, like Don Hamson of Plato Asset Management, have called on Australian investors to keep calm in the face of this reform.
“Franking credits are still around, and most people can still use them,” he said.
“Most people will still get the benefit of franking credits, even ones that will lose a little bit will only be about 10 per cent,” he added.