Labor to scrap franking credits?

Labor to scrap franking credits?

The big news of yesterday was undoubtedly the announcement by Labor of its plans to, if elected, scrap the system of refundable franking credits.

The planned changes specifically target those low-income tax paying investors that receive cash refunds from franking credits, and in particular will affect super funds in pension phase.

Those franking credits will still act as tax deductions but will not reap cash refunds if those franking credits exceed the total tax owed.

Additionally, the CGT discount which applies to investments held longer than twelve months will reduce to only 25% of the gain from the current 50%.

If Labor wins the next election, these changes will be implemented on 1 July, 2019 and the changes will affect 200,000 of the 600,000 self-managed super funds along with another 1.2 million tax payers.

There is still a lack of clarity to some aspects of the proposed changes such as whether the new CGT discount will apply to investments retrospectively or only to new investments.

Needless to say, these are significant proposed changes and my expectation is that they will be far more unpopular than Labor has anticipated. Fully franked dividends have been a target of retail investors in Australia ever since the system was implemented, and retirees relying on this income stream will be greatly affected.

Additionally, there are likely to be significant unwanted effects of the changes such as a shift out of investments paying corporate tax such as equities (like the banks) and into those that pay no tax such as real estate investment trusts and infrastructure funds.

Additionally, property is likely to see a huge boost in investment interest from the SMSF audience – a huge potential negative for an asset class that is already well beyond affordable for the millennial generation.

So, despite the bluster and the fall in the stock market in response, it remains to be seen whether Labor will receive the sort of response it expected. Given the unwanted effects these changes could have, I expect a very negative response and some watering down of the proposal by the time the election rolls around.

comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.