Tax Planning and Disappearing Franking Credits
The policy proposal from the Opposition to stop the refund of ‘excess’ franking credits to individuals and superannuation funds is expected to save the Federal Budget $59 billion over 10 years.
This will never be achieved. There has been such an instant uproar about this policy, Labor have already started tweaking the policy to suggest they will increase welfare even more, to subsidise low income Australians impacted by the policy.
There goes some of the $59 billion, in more welfare.
A policy change, supposedly directed at the rich, which results in the welfare budget increasing.
If this only affected the rich, do you think there would be such an uproar on talkback radio, and in the newspapers?
A policy change to collect tax from the rich is never successful – unfortunately, Australia does not have enough really rich people to tax, to help the dire state of the Federal Budget. The greatest budget impact, is by attacking the poor / middle income earners, as this is where the greatest dollar-impact is. Despite the political messaging about this policy targeting the ‘rich’, the poor and lower income earners – including superannuation funds in accumulation phase – will be the real losers.
This policy will also change behaviour. Companies, currently motivated to pay high franked dividends. They will change what they do (their earnings, their investments, their dividend policy) to attract investors to their growth story, while reducing dividends.
‘Rich’ investors who currently sensibly use franking credits and who would otherwise lose access to them should this policy become law, will be advised to alter their investment strategy. Their self managed superannuation funds may reduce or eliminate franked dividend style investments. They will redirect their investments to international options, or property, or other ASX investment options not providing franked income, and instead have their investments yielding franked dividends in their own name if they can utilise those tax credits against tax on other personal income, such as interest income, net rental income, or trust distributions.
The rich, with large and diverse portfolios wills simply shuffle those investments to the most suitable ownership: shares with franked dividends personally, and unfranked style income in the superannuation fund … it is not rocket science.
The current value of franked dividends being earned through pension-phase superannuation funds, which the $59 billion is significantly based, will fall as ‘rich’ investors alter their strategies. The potent policy, will become rather limp.
Low and middle income earners, who do not have the financial advisors to help them will be unable to access the franking credits (a huge saving to the Federal Budget), and the rich people will have updated their investment strategy to ensure every dollar of franking credit is collected.
The $59 billion saving to the Federal Budget will resemble the Mining Tax that was so watered down in favour of the mining companies that they ended up supporting it, knowing it would not hurt them.