Treasury has admitted the Albanese government’s proposed crackdown on franking credits could be seen as a tax hike by stealth in a particularly touchy area for Labor already battling accusations they are breaking electoral promises.
The government introduced a bill last month into parliament that seeks to restrict the ability of companies to distribute franking credits to shareholders as part of an off-market share buyback or capital raising.
Franking credits prevent shareholders from being taxed twice. They offset the amount of tax a share investor pays because the dividends they receive come out of profits, which have already been taxed at the 30 per cent company rate.
The new measures, which will reap $600million, attracted overwhelmingly negative public feedback labelling them a tax increase or ‘winding back’ of franking credits, according to documents released under Freedom of Information to the opposition.
In talking points for Treasury officials appearing before Senate estimates hearings following the October budget the department admitted ‘there were significant concerns raised by the public’ in around 2000 submissions.
‘Concerns were raised over retrospectivity, policy objective and potential for the legislation as drafted to capture legitimate commercial practices,’ the documents say.
‘Treasury is considering the issues raised.’
Treasury went on to say that shareholders benefitting from credits attached to off-market could argue the new policy ‘is effectively a tax increase or a winding back of dividend imputation’.
Labor’s proposals treat off-market share buybacks the same way as on-market buy-backs, which would net the budget $550m a year.
On-market buybacks are when a company buys its shares through an exchange, such as the ASX, whereas off-market buybacks are when a company will offer to buy shares back directly from the shareholder.
Labor’s proposals would most potentially affect those living off investment income who are often over 75, superannuation funds and charities.
Anthony Albanese’s (pictured with partner Jodie Haydon) government has been accused of breaking another election promise with major changes to franking credits set to be announced
With Labor already copping flak over its proposed increase in superannuation tax the opposition has seized on the new measures, which the former Coalition government proposed but backed away from, as another broken promise.
Shadow treasurer Angus Taylor said Prime Minister Anthony Albanese and Treasurer Jim Chalmers promised to keep their hands off franking credits to get into office.
‘The Prime Minister and the Treasurer went to the election promising Australians that they ‘wouldn’t touch’ franking credits and yet in 10 months they’ve added two tax grabs on Australian shareholders,’ Mr Taylor said.
‘This is just another tax on super. Another tax on Australians’ retirement savings. And another broken promise on tax.
‘Whether it is franking credits or superannuation, Labor can’t control its spending and so it’s going after the hard-earned dollars of Australians to pay for its pet projects.’
The Albanese government has labelled the new measures as ‘integrity’ ones that close loopholes mainly exploited by big companies and institutional investors.
‘We took into consideration all of the matters raised, including the significant number of campaign replies,’ Assistant Treasurer Stephen Jones said.
‘The vast majority of investors will be completely unaffected, and will continue to receive their franked distributions.’
Aussies aged over 75, Australian super funds and companies, and charities have been found to benefit the most from franking credits
Labor would have cause to be jittery because any tinkering with franking credits could raise the unwelcome spectre of the 2019 election.
Under then leader Bill Shorten Labor was at short odds to beat the Coalition led by its third prime minister in six years, Scott Morrison.
However, it turned into a shock defeat with Mr Shorten himself largely blaming the anxiety raised among retired ‘mum and dad’ in vestors by Labor’s more to end franking credits.
For the the May 2022 election Mr Albanese vowed there would no changes to superannuation.
But late last month, he announced his Labor government would stop Australians with more than $3million in super from being able to make contributions and pay a concessional rate of just 15 per cent, from July 1, 2025 after the next federal poll.
WHAT ARE FRANKING CREDITS?
Franking credits are tax credits that stop ‘double taxation’.
Companies have already paid tax on their profits when they hand them out to shareholders as dividends.
Dividends, which are typically funded by profits, are then distributed to shareholders ‘fully franked’, with a ‘franking credit’ applying.
At tax time, shareholders get the value of the franking credit as a tax refund.
That means they don’t pay tax on profits, because a company has already paid tax. This stops double taxation.