January 2019

Labour has announced plans to restrict certain existing tax exceptions for investors, if they were to win the coming elections. The party argues that the existing rebates and incentives – including those on capital gains, negative gearing, and franking credits – lead to tax avoidance.

All of these proposed tax changes share a similar trait, in that they will largely affect wealthier voters with funds to invest. The most substantial of these planned policy changes are the ones affecting franking credits.

The current franking credits system was introduced by the Howard government, and allowed avoidance of tax on company profits. Individuals under this system have therefore been able to – under certain circumstances – receive cash rebates for corporate tax, even if they paid no taxes.

The ALP are not proposing to remove franking credits completely, however. Labour’s plan is to return to an earlier version of the system introduced by the Keating government. This simply means that fully funded retirees who are investing directly or via SMSFs will no longer receive net refund of franking credits. Under the new proposal, investors would still be able to offset tax payables via franking credits.


Criticisms and Potential Negative Effects

The proposed policy has been criticised by self-funded retirees who feel the change will impact their SMSFs, reducing their income.

The changes may also negatively affect banks and their other shareholders, potentially wiping billions from the major banks’ value, according to a report released by Investment Bank Citigroup.

The report found the banks’ shares could fall by up to 13% if the proposed changed to franking credits are made, which would in turn impact the banks’ shareholders.

“Citigroup's analysts found that as franking credits made up a large proportion of the value of the major banks, any changes to the system would flow through to shareholders,” reports the Sydney Morning Herald. 

The Citigroup report adds that these policy changes would also affect the target share prices set by the major banks. The extent of the effects would depend on the final policy, as well as how future dividends would take shape.

Livewire Market’s analysis shows similar results, finding that the impacts of the proposed changes may be large for retirees with SMSFs.


Potential Benefits

Supporters argue that the change will compel many retirees to use their superannuation rather than saving it.

Although investors, including many retirees, will stand to lose if the ALP returns to the system introduced under the Keating government, The Age argues that, for more than a decade, this group has already managed to do very well for themselves, and therefore “it is hard to understand why they should be entitled to tax-free profits” going forward.

Moreover, the tax gained from the changes has a potential to raise over $11 billion over 4 years and $55 billion of a period of 10 years. These raised funds could be used to pay for public infrastructure projects like hospitals and schools.

The issue will likely spark impassioned debate throughout the run-up to this year’s elections, becoming a significant campaign issue within Australia.

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