Killing Off Franking Credits !

Bill Shorten's plan to cancel cash refunds to 1.2 million taxpayers who enjoy tax credits on the dividends they receive from owning shares would give him a $5.6 billion war chest to entice votes at the next Federal election.  It is hoped that new benefits for younger voters will more than compensate for votes lost by pensioners and older Australians who benefit from the " franking " system applied to share dividends.

One other benefit that Shorten seems to choose to ignore is how this move will be received in the company sector.   That franking applied to dividends is really an affirmation that the company concerned has paid all required taxation on its profits if a hundred percent franking is granted.  Even fifty percent franking is far superior to a dividend which will be fully taxed when added to the earnings of income submitted to the tax office.

When people buy shares one of the things they consider is the franking status of dividends.  That is an accolade for which the company can be proud and it contributes to the share price.  If it is devalued then that affects the share price accordingly, and with that the incentive for the company to meticulously obey all tax ordinances to achieve franking status.

Shorten is now talking about putting a five hundred dollar - or perhaps a thousand dollar - limit on converting franking credits to refunds by the tax office so that the pensioners and retirees with a small share holding might be protected from this money grab.

That is typical of the Labor parties socialist roots.  The whole purpose of franking was to avoid double taxation.  A company is taxed with a variety of laws as it trades and when it eventually achieves a profit some of that money is distributed to shareholders by way of a dividend.  Without the benefit  of franking that is then taxed again when included in the income of the shareholder.

In Australia, when someone retires they are handed their superannuation " pot " of money and have to make investment decisions so that it lasts for the remainder of their lives.  Some elect to put it in shares or select a mix in which shares play a big part.   Often, they are part pensioners and therefore do not need to file an annual tax return.  That franked dividend is therefore useless unless they can have it converted into a cash refund cheque by the tax office.

Labor now seeks to ignore the double taxation issue and concentrate on the wealth of those  receiving dividends from shares.  It seems to suggest that money is preferably better managed in the hands of the government than in the hands of individuals and that is the basis of the parties socialist policy platform.  This suggested five hundred dollar - or thousand dollar limit - puts a further limit on the wealth an Australian pensioner or retiree will be permitted to accumulate.

Once double taxation fairness goes out the window, expect many trading companies to become more interested in tax dodges and less interested in franking.   Removing the ability to turn franking credits into cash income will hurt a lot of people and simply change the tactics employed when it comes to money management !