With an election looming, it is currently forecast that Labor will take government. Perhaps Labor’s most contentious reform is the decision to remove tax refunds for those with excess franking credits on their shares.
Put simply, when an investor receives dividends from their Australian shares, these dividends have usually already paid 30% tax by that company. This tax is called a ‘franking credit’ and investors on tax rates lower than 30% would generally receive a refund of this extra tax paid by the company so they are not taxed more than they should. The proposed policy is that these tax refunds would no longer occur.
The potential impact of this is as follows:
- Retirees and super funds will be the largest impacted as they will lose their tax refunds from shares (ranging from a few thousand dollars to tens of thousands), thus reducing their yearly income
- Australian shares may become less popular as they are effectively taxed at up to 30% on income compared to other investments that are tax free
- Listed fixed interest securities such as hybrid shares could be impacted the most
The following are a non-exhaustive list of some of the strategies we are considering for our clients to manage this reform:
- Consider having Australian shares in a higher taxed location such as outside super, where the excess franking credits can be used to a greater extent
- Consider reviewing your investment strategy generally and whether you need to consider other asset classes
- Consider introducing children into self-managed super funds to use up those excess franking credits
It is very important to keep in mind that Labor have not yet taken government and this legislation may never occur, therefore we would suggest a gradual re-alignment as a precaution rather than a wholesale change to one’s structure.
If you are concerned about how franking credit reform will impact the performance of your portfolio or tax refund that you receive, please do not hesitate to contact myself or any of our William Buck Wealth Advisors.
To contact Andrew Barlow call (08) 8409 4333 or, email andrew.barlow@williambuck.com.
