The Australian Labor Party has proposed changes to Australia's dividend imputation system in the lead-up to the forthcoming federal election.
What is dividend imputation and what is the current system?
Dividend imputation is a part of the company tax system in Australia. It allows an Australian company to provide their shareholders with a tax rebate (credit) on the dividends they receive. This rebate reflects the tax already paid by the company on the dividends. Dividends with this rebate are known as "franked" dividends.
Shareholders receiving franked dividends are able to reduce their tax payable by the amount of the credit. It therefore avoids the dividend being taxed twice (once at the company level and once at the shareholder level).
Under the current system, if you receive more franking credits than you owe in tax, you're entitled to a tax refund from the Australian Taxation Office.
The dividend imputation system was intended to make investing in Australian companies attractive to help generate employment and taxes. This benefits the Australian economy as a whole.
What dividend imputation changes are Labor proposing?
Labor's policy is to abolish cash refunds on franked dividends for all Australians except for:
Labor is proposing to make this legislative change from 1 July 2019 if they win the federal election.
In other words, if Labor wins the election and implements this policy, you'll only be able to use franked dividends to reduce the amount of tax you pay, you won't be able to use them to receive a tax refund (unless you're in an exempt category like pensioners). Labor has excluded pensioners from the change in response to a backlash from many older Australians who rely heavily on franking credits to supplement their retirement income.
Superannuation funds will also be affected by the proposed change in terms of the returns on their share-based investments. However, self-managed super funds (SMSFs) with at least one member on the pension before 28 March 2018 will be exempt from Labor's proposed dividend imputation change.
What are the benefits of investing in shares?
Shares can provide you with capital growth potential in addition to providing you with dividends. The Australian share market has historically provided long-term growth for investors. However, it's important to understand that the value of shares can go down as well as up, and dividends from shares in a company aren't guaranteed.
How we can help
If you're currently receiving a refund from the ATO due to your franked dividends, your income will be affected if Labor wins the looming federal election and implements their proposed dividend imputation policy (unless you're a pensioner). It will be important for you to re-evaluate your investments and financial situation.
At TGFS Financial Planning, we help our clients to tax-effectively plan their financial future. We take the time to understand your goals, needs, and objectives so that we can provide you with a tailored financial solution.
Contact us today on 1300 755 521 to find out how we can help you!
TGFS Financial Planning is an Authorised Representative of Consultum Financial Advisers Pty Ltd. ABN 65 006 373 995 AFSL No 230323 (Consultum).This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.