What are Franking Credits?
A Company, whilst a separate legal entity, is owned by its shareholders, so when it pays 30% tax on its profits and than pays these profits back to its shareholders called dividends, there is tax paid or with held from the dividends on behalf of its shareholders.
These are called Franked Dividends.
Want to learn more about the difference between Franked and Unfranked Dividends? Click here for a more in depth article.
Unfranked Dividends are dividends paid where there has not been any tax taken out of them.
A shareholder would include these dividends to the rest of his or her income and tax calculated on the total income.
If they are on a tax rate that is equal to or less than 30% they will receive a refund since too much tax have been deducted from their dividends
For example If they are on a 20% tax bracket than they would get a refund of 10% because the company had with held too much tax at 30%
However if the shareholders personal tax rate is 47% than he/she would need to pay a top up tax of 17% since 30% has already been paid by the company on his/her behalf.
If the shareholders personal tax rate was nil than he/she would receive a refund of 30% as the company had with held too much tax at 30%.
This is not dissimilar to when banks withhold 47% tax from your interest earned due to not supplying a tax file number.
The ATO would refund you the difference if your actual tax rate was less than 47% when you lodged your tax returns at the end of the year.
When the Labor government said that “people who have not paid any tax should not get a refund” they were completely wrong in their assessment.
Labors Policy would have punished all low income earners (who are on less than 30% tax rate) and who received a franked dividend because they have indeed paid tax at 30% when the company with held 30% tax from their dividends. To suggest they did not pay tax and therefore not entitled to a refund was completely wrong.
Hence if a pensioner was on zero tax rate, they should be refunded the 30% tax that was deducted/withheld from their dividends
By refusing to refund a taxpayer it effectively forces that person who normally is on a low tax rate (below 30% tax) into paying 30% tax.
This naturally affects all low income earners. The very people whom Labor is suppose to help.
This made no sense.
The high income earners did not get affected because they had other income that would utilise the franking credits.
This was contrary to the claim from Labor that the Policy would tax the rich.
What’s the reaction?
This became known as the Retirees Tax. On average the retiree would lose around $6,000pa in income/franking credits. When you are earning on average around $40,000pa and you lose $6,000 that constitutes around 15% of your income with no hope of earning that elsewhere as they are too old to get a job. This was a huge blow to this group.
Secondly, having made plans around the rules at the time this was devastating to this sector, as they could not make up the loss via a job and could not get a top up from the old age pension as they were earning too much to qualify. So this loss was directly off their lifestyle. It would have meant not being able to have a restaurant meal or run a car or an annual holiday.
Thirdly, Industry and Union Superfunds did not lose their franking credits and directly discriminated against self funded retirees and Self managed Superfunds.
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