16 May 2019
Tax
Let’s be frank about franking credits
By Daniel Mathers | Principal of DW Mathers & Co. and Future Key Financial

Franking Credits

By now I’m sure you’ve heard that the Federal Opposition is planning to introduce changes to the tax treatment of franking credits should they win government at the upcoming General Election on Saturday 18 May.

What is a franking credit?

Simply put, a franking credit is a tax credit that you may receive if you are in receipt of a dividend or distribution from company or trust.

Currently, franking credits are what is known as a “refundable tax offset”, meaning that if your overall tax liability is less than the franking credits received, you currently receive a refund of the excess.  This is what the opposition is looking to remove.  In other words, you’ll still receive the franking credit offset, you just won’t receive a refund of the excess. This reverts to the policy that was in place prior to 1 July 2000.

Will this affect me?

Well, that depends on several factors.  If your taxable income is above $37,000 and you receive dividends and franking credits on top of this, you will not be affected by the opposition’s proposed changes because you already do not receive a refund of the franking credits.  Any refund you already receive is likely to be another form of tax – for example overpaid PAYG instalments or PAYG withholding.

If your taxable income is under $37,000 and you currently receive a refund or receive franking credits in a self-managed superannuation fund, you may be affected by the proposed changes.

I feel strongly about this issue but do not want to vote for the current government, what should I do?

The ability for a government to pass proposed legislation depends on them having control of the lower house for starters (i.e. the opposition needs to win the election) and have the ability for their legislation to pass the Senate.  So – if you don’t wish to vote for the current government, you may wish to consider voting for a minor party in the Senate that will likely hold the balance of power.

It is my personal view that (unless there is a landslide victory to the opposition) that there will be some concessions made to the proposed legislation, which may include a cap on the amount of refundable franking credits you are entitled to receive before they become non-refundable.  There is a significant amount of opposition to these proposed changes and any future government may need to either negotiate with the crossbenchers or minor parties to see legislation passed.

Whatever happens, it is important to review your business and investment structure yearly to ensure you are structured in the most tax-effective way – contact us to arrange a time.