Retirement, Tax

Tax impact of franking credits remains unaddressed

tax impact; franking credits

The impact of franking credit refunds on the wider tax base has yet to be addressed, despite being a major election issue.

The federal government will still need to address the tax impact of franking credit refunds, despite campaigning against their removal during the recent election, according to a tax partner with a major advisory firm.

KPMG asset and wealth management tax partner Damian Ryan said the election debate on refunds did not consider the tax policy link between corporate tax and franking credit refunds.

“During the election campaign, on one side refundable franking offsets were described as a ‘tax rort by the big end of town’. On the other side, providing an offset but not a refund was described as a ‘new tax on retirees’. In reality, neither description is accurate,” Ryan said.

He said this level of discussion on the issue did not consider that if more shares were held by a growing pool of retired individuals and superannuation funds, and they claim franking credit refunds, less corporate tax would be added to Australia’s tax base.

“To state the obvious, where the excess is refunded, the federal government is refunding part of the corporate tax base. This is not necessarily wrong. It is, however, a tax policy choice, with longer-term implications for the stability of the revenue base,” he said.

He said there were two ways of viewing the franked credit system and both had merit from a tax policy perspective.

The first is the imputation system is used to avoid double taxation on company profits and therefore provides an offset for the franking credit, but does not provide a refund.

The other view is that an individual or superannuation fund should be treated the same regardless of whether they received the income directly, or invested collectively via a company, and received the return via a dividend.

“The policy issue is whether income tax at a corporate level is a tax in itself, or rather a prepayment of tax, with the ultimate level of tax dependent upon the tax profile of the individual and the superannuation fund,” Ryan said.

“Either position is defendable from a tax policy perspective, but it comes with fiscal consequences.

“Assuming that the current situation of refundable franking credits continues, then Australia will continue to refund part of its corporate tax base.

“The other alternatives are to accept the reduced tax base, and correct spending accordingly, or to revisit the tax base, including consumption taxes, which is just as politically difficult.”

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