A long and frank discussion with Muirfield Financial Services

Suddenly, because of their prominence in the upcoming election campaign, franking credits from Australian share dividends have become a topic of household conversation (after the small talk about recent rainfall).

The policy mechanics aren’t straightforward and often get muddled in the political debate so you’re forgiven for being confused.

Regardless of your political persuasion, it’s an important topic shaping the election and has created many questions for clients.

As an advice business helping retirees, Muirfield Financial Services has been assisting clients to better understand the system, how it works and most importantly, how it relates to their own personal financial situation.

For our long-term clients, the conversation is one we’ve been having for over 30 years and it’s evolved over time.

In 1987, Paul Keating established policy to provide a tax rebate for each tax-paying dividend recipient.

Taken off their tax would be the company tax the company had paid on the part of the profit that had been handed to them as a dividend.

In 2001, John Howard supercharged the system by allowing franking credits from dividends to be paid out in cash to shareholders who didn’t pay tax.

This is often the case for retirees who do not have personal tax liabilities after finishing work.

The 2001 change to the system also benefitted super funds in retirement (pension) phase where fund earnings are untaxed.

In this case, the super fund rather than the individual can claim the franking credits back as a cash refund.

Since 2007, the changes made by Howard became even more beneficial to retirees as super withdrawals after age 60 became tax-free and didn’t need to be declared as taxable income.

This meant retirees on reasonable super incomes were no longer taxed as their other income, including income from shares, fell under the tax-free threshold (currently $18,200).

As a result of the change, instead of paying income tax to the government, many people become non-tax payers and became eligible to claim the franking credits back as a tax refund.

For many retirees, this was (and still is) an important source of income that helps to cover the cost of living.

Labor’s proposal, announced in mid- March 2018, would return the divided imputation system to where it had been before Howard changed it in 2001. Tax credits could be used to eliminate a tax payment, but not be payable as a refund to those who don’t pay tax.

In late March, Labor amended its policy by adding a “pensioner guarantee” to ensure Centrelink Pension and Allowance recipients, even part-pensioners, would be exempt from the changes and would continue to receive cash payments.

Whether you support the policy or not, it is important to acknowledge the changes are only proposed, and are yet to be legislated.

The debate serves to highlight the ever-changing nature of the political, economic and investment landscape faced by retirees.

So before overhauling your share holdings or super fund strategy, consider a frank discussion with a professional adviser to better understand your situation.