We’ve been closely watching the tax debate around Labor’s proposed policy to abolish a cash rebate for shareholders who pay little or no tax. The issue looks set to erupt into a policy showdown with the Government and Labor competing on how best to use some $60 billion over 10 years.
Serious implications for retirees
If Labor gets into power at the next election, this could have a serious impact on the income that retirees will receive in the future.
Our strategy and legislative team will continue to follow developments so we’re one step ahead of any change.
When we see there’s a need to act, we’ll inform clients.
For the meantime, here’s a brief overview of where the proposed policy is currently sitting.
What is Labor proposing?
In mid-March Labor announced a controversial tax policy which would axe tax-credit refunds for retirees in a sweeping crackdown aimed at saving $59 billion over the next decade. Labor wants to reform the system that allows share investors, who technically don’t earn a taxable income, to get government cash refunds for share dividends.
Currently, the additional return on Aussie shares with a full refund of franking credits is an increase of 43%. So, for example, if you own shares with a dividend of 6%, the franking credit increases that to 8.58%. A $100,000 portfolio currently receiving an average of 4% would earn $4,000 of income plus an additional $1,714 of franking credits.
When you consider the dollar value of this, it’s clear that Labor’s policy initiative has the potential to seriously impact the income that retirees will receive in the future.
Who would be affected?
The proposed changes could affect members of more than 591,000 self-managed superannuation funds.
But retirees with account-based pensions in Wrap accounts that have direct shareholding could also be affected in the same way those with self-managed super funds look to be affected.
First revision published
This is all dependent, of course, on Labor winning government in the next election. But the policy has already been amended. Just days ago, Labor revised the proposal to exempt 300,000 pensioners and welfare recipients from the plan.
The revised plan will ensure pensioners with individual shareholdings receiving the age pension, disability support pension, carer payment, parenting payment, Newstart and sickness allowance will not be hit.
Labor has now guaranteed pensioners will still be able to access cash refunds from excess dividend imputation credits.
Self-managed superannuation funds with at least one pensioner or allowance recipient before the amendment was announced will also be exempt from the changes.
Election-decider to watch
Opponents say the proposed changes could hurt shareholders who have made investment choices based on current rules, and lead to a re-evaluation of some shares on the stock market currently favoured for their dividend imputations.
There’s no doubt this controversial policy will be at the centre of the economic debate to decide the election next year. It has serious ramifications and we will keep it on our watch list.