With a Federal Election around the corner, there is a strong chance a new government will be voted in. The Opposition to their credit has been very upfront with their policies and if elected there will be significant changes to the tax and superannuation landscape. This series of articles will look at Labor’s major policies and their potential impact on you moving forward. 

Article One – Franking Credits 

The policy which has attracted the most publicity initially due to its controversial nature is Labor’s policy to remove the refund of excess franking credits to taxpayers. Under current regulations, if a taxpayer receives franking credits with a dividend payment, the franking credit can be used to reduce the tax owed on the income as well as to generate a tax refund. In effect the ATO refunds tax paid by the company to the taxpayer if they are paying tax at a lower tax rate than the corporate tax rate. Many individuals and super funds have utilised this law to help generate large tax refunds from their predominantly Australian share investment portfolios

Labor proposes to reverse this law and only allow franking credits to be used to reduce tax. In effect, any excess franking credit which would lead to a refund will be lost and not be refundable. After complaints from pensioners that this change would penalise them and remove a much needed cash flow source, Labor also proposed a carve out to the policy. Any taxpayer eligible for the age pension would still be allowed to access a refund from the franking credits.

It will be interesting to see whether companies begin to pay higher dividends in the coming months to utilise their franking credits prior to any change and if Labor wins government whether this change will lead to any investment bias against Australian shares.