Robbing " Franking " Dividends !

When a company makes a profit it first must pay the government what it owes in company tax.  It is then free to distribute a dividend to its shareholders, who must declare the money they receive in their tax return and it was again taxed when their income was assessed.    Clearly this was double taxation.

A long time ago the government recognised this anomaly and introduced a " franking " component to dividends.  This is recognition that the money has had company tax paid and can be claimed as a reduction in the receivers tax bill.  In this way, it eliminates that double taxation issue.

That was fine for those who earn at a level that requires a tax return each year, but the benefit was lost by pensioners and those below the taxable threshold.  As a result, they are now entitled to make application to the government to have that franking amount reimbursed in the way of a dividend cheque from the tax office.  A political party is threatening to disallow these cash refunds to those below a taxable income, but still allow the input for those who submit a tax return.

In the world of politics it is argued that if people are not actually paying tax, then they have no right to a dividend from the tax office.  That political party hopes to use the billions gained to fund promises that will gain them votes at the next election.

Their Treasurer claims less than one percent of full pensioners would be hit by the changes and it would apply to just fifteen thousand people.   The media's costings see it differently.   Up to a quarter million  part pensioners would be affected, which is almost a third of those drawing a part pension in Australia.

That political claim ignores the huge number of self funded retirees who have a small portion of their retirement funds invested in shares and are below the taxable threshold.   Those franking dividend cheques are vital to providing living expenses and formed part of their retirement strategy when they planned their retirement.    Removing it now would be similar to moving the goal posts while the game was in play.

There is another factor that seems to have been disregarded in New South Wales.  Many years ago the NRMA demutualized and handed ownership back to its members by way of shares in its insurance arm.   Those who were members to receive road service benefits found themselves shareholders and many of those are now pensioners who value those dividend cheques and their franking component from the tax office as pension supplements.   There are a vast number of people in which this is their only venture into shareholding.

What is not being mentioned in this furore is the grading of franking to ensure that companies pay their fair share.   A company which meets all the obligations of the tax department may be allowed to issue franking at a hundred percent of face value, while those using reduction measures may only be allowed half their face value.   This determines the value placed on those company shares in investors eyes and has an effect on trading volumes.

All this is pure political gamesmanship - also known as " kite flying ".   The political party in opposition suggests a policy change to judge the levels of support or opposition.   It is a long way to the next election and if the findings are negative that policy can be quietly dropped by the wayside.
It is most unlikely that this blunt instrument of oppression will remain when the politicians finally face the voters !