{"id":435,"date":"2019-04-11T17:54:44","date_gmt":"2019-04-11T09:54:44","guid":{"rendered":"https:\/\/www.paragonconsultants.com.au\/?p=435"},"modified":"2023-10-23T11:26:29","modified_gmt":"2023-10-23T03:26:29","slug":"understanding-the-proposed-changes-to-imputation-credits","status":"publish","type":"post","link":"https:\/\/www.paragonconsultants.com.au\/understanding-the-proposed-changes-to-imputation-credits\/","title":{"rendered":"Understanding the Proposed Changes to Imputation Credits"},"content":{"rendered":"\r\n

In 2001, a concession was created by the Howard and Costello Liberal Government to allow unused imputation credits to be refunded to taxpayers. Recently, Federal Opposition leader, Bill Shorten, announced a proposal to cut this concession if his Government is elected. Much of the media focus following this announcement was on the impact these changes would have for retirees.

With many retirees now wondering how this change would affect them, it’s important to understand what the tax imputation system is, how it works, and the impact the change could have on your retirement income.

What is the Australian tax imputation system?
<\/strong>
All companies pay tax on their profits. The remaining funds can then be distributed to the owners of the company, i.e., the shareholders, as dividends. These dividends, classified as income, are also taxed.

Simply put, the same portion of taxable income is taxed twice.

This is where the tax imputation system comes into the equation, because it is designed to remove this \u2018double dipping\u2019 by the ATO.

Under the current system, when a company pays a dividend, it attaches imputation tax (or franking) credits to the payment. When the shareholder lodges their tax return, they are taxed on the full amount, but the franking credits are applied, thus reducing their actual tax payable.

For example:
<\/strong>
An individual receives a cash dividend of $700 with an imputation tax credit of $300 attached (the company has already paid this $300 as tax), bringing the total taxable income to $1,000. Assuming the shareholder is an individual with other income, when they lodge their return, the franking credit is applied to their taxable income. If the shareholder does not earn enough taxable income, the credits are paid to the individual as cash. These amounts vary depending on the individual\u2019s taxable income and marginal tax rate.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\u00a0Individual Marginal Tax Rates <\/strong><\/td>\r\n<\/tr>\r\n<\/thead>\r\n
\u00a0<\/td>\r\n0%<\/strong>\u00a0<\/td>\r\n\u00a019%<\/strong><\/td>\r\n32.5%<\/strong>\u00a0<\/td>\r\n\u00a037%<\/strong><\/td>\r\n\u00a045%<\/strong><\/td>\r\n<\/tr>\r\n
Company profit<\/strong><\/td>\r\n\u00a0$1,000<\/td>\r\n\u00a0$1,000\u00a0<\/td>\r\n\u00a0$1,000\u00a0<\/td>\r\n\u00a0\u00a0$1,000<\/td>\r\n\u00a0\u00a0$1,000<\/td>\r\n<\/tr>\r\n
Franked distribution<\/strong><\/td>\r\n\u00a0$700<\/td>\r\n$700\u00a0<\/td>\r\n\u00a0$700<\/td>\r\n$700\u00a0<\/td>\r\n\u00a0$700<\/td>\r\n<\/tr>\r\n
\u00a0+ Imputation credit<\/strong><\/td>\r\n$300\u00a0<\/td>\r\n$300<\/td>\r\n$300<\/td>\r\n$300<\/td>\r\n$300<\/td>\r\n<\/tr>\r\n
Total assessable income<\/strong><\/td>\r\n\u00a0$1,000<\/td>\r\n$1,000<\/td>\r\n$1,000<\/td>\r\n$1,000<\/td>\r\n$1,000<\/td>\r\n<\/tr>\r\n
\u00a0Gross tax<\/strong><\/td>\r\n\u00a0$0<\/td>\r\n\u00a0$190<\/td>\r\n\u00a0$320.50<\/td>\r\n$370\u00a0<\/td>\r\n\u00a0$450<\/td>\r\n<\/tr>\r\n
\u00a0– Less imputation credit<\/strong><\/td>\r\n$300\u00a0<\/td>\r\n$300<\/td>\r\n$300<\/td>\r\n$300<\/td>\r\n$300<\/td>\r\n<\/tr>\r\n
\u00a0Net tax payable<\/strong><\/td>\r\n\u00a0$0<\/td>\r\n\u00a0$0<\/td>\r\n$20.50\u00a0<\/td>\r\n\u00a0$70<\/td>\r\n\u00a0$150<\/td>\r\n<\/tr>\r\n
\u00a0Excess credits (refund)*<\/strong><\/td>\r\n\u00a0$300<\/strong><\/td>\r\n\u00a0$110<\/strong><\/td>\r\n\u00a0Nil<\/strong><\/td>\r\nNil<\/strong><\/td>\r\nNil<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\n\r\n\r\n

*Where an individual\u2019s tax rate is greater than zero, the amount of refund would firstly be used to reduce any other tax liability, with any remaining paid to the individual as a cash refund. [1]<\/a><\/p>\r\n\r\n\r\n\r\n

What these changes may mean for you<\/strong><\/p>\r\n\r\n\r\n\r\n

As a retiree, your income is likely to be affected in one of two ways \u2013 through shares you hold directly or via the shares held by your superannuation fund.<\/p>\r\n\r\n\r\n\r\n

How your super fund is affected will vary. Large APRA regulated funds will be largely unaffected but self-managed funds, where there are insufficient or no tax liabilities that can be reduced by imputation credits, are more likely to feel the impact.<\/p>\r\n\r\n\r\n\r\n

Super fund earnings are currently exempt from tax if they are in the pension phase, assuming they have a member balance less than $1.6 million. These super funds benefit from franking credits in the form of a cash refund from the ATO.<\/p>\r\n\r\n\r\n\r\n

However, the greatest impacts are likely to be felt by retirees or pensioners who hold company shares directly. Although there have been some case studies highlighted in the media, at this stage, there is very little actual analysis available.<\/p>\r\n\r\n\r\n\r\n

What is the Pensioner Guarantee?<\/strong><\/p>\r\n\r\n\r\n\r\n

The Labor party acknowledges that a small portion of pensioners rely on the cash refunds from excess imputation credits and to protect them, will issue a Pensioner Guarantee.<\/p>\r\n\r\n\r\n\r\n

According to Shadow Treasurer, Chris Bowen\u2019s website,[2]<\/a> under the Pensioner Guarantee:<\/p>\r\n\r\n\r\n\r\n