Franking credits raid just another piecemeal revenue grab - The Centre for Independent Studies
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Franking credits raid just another piecemeal revenue grab

It was entirely predictable that Labor in opposition or in government would eventually get around to withdrawing the refundable status of dividend franking credits. After all, in government they would have big spending promises to pay for and would also have to offer some form of personal income tax relief.

Franking credit refunds are a bucket of money they can grab in the belief that only the Liberal voting base will suffer. They have the support of some tax experts who believe refundability is unjustified.

At least Shorten and Bowen deserve credit for revealing their intentions before the election and not waiting until after it. But that is where the credit should stop: as a tax policy, it is misguided.

Full refundability is consistent with the logic of the dividend imputation system, which is that the full and final tax on a dividend should be the shareholder’s own marginal rate.

In the case of a pension-paying self-managed superannuation fund, for example, the marginal rate is zero, and to reach that position (leaving aside any other taxable income) there has to be a refund of the 30 per cent tax paid by the company, which is essentially a pre-payment of personal or super fund tax.

The same principle means that some super funds paying 15 per cent tax, and some low and middle income individual taxpayers, also qualify for refunds.

Impeccable logic

Unlike many policies today – which are developed on coasters, backs of envelopes or through focus group deliberation – refundability was carefully thought through. It was initially proposed in the 1998 white paper that introduced the GST, and subsequently endorsed by the Ralph Review of Business Taxation before being set into legislation.

The logic of refundability is impeccable, and the principle at stake is the avoidance of double taxation of dividends. Those objecting to refunds are taking a pragmatic position that for revenue reasons the principle should be limited in its application. That is why refundability was not part of the original 1980s (Labor) design of the imputation system. That fact might give Chris Bowen a debating point, but it is not a denial of the principle underlying the current design.

There is also a school of thought opposed to imputation in principle, particularly as Australia is one of the few countries that still have it, and the increased international mobility of capital since the 1980s has rendered imputation less suitable for us. This school is happy to see any reduction in imputation as a step towards its ultimate abolition.

Indeed, the dividend imputation system should not be off-limits in any broad tax reform. For example, there is a debate to be had about trading off imputation for a company tax cut larger than the government is proposing – such as all the way to 20 per cent. But shutting down refundability isn’t reform; it’s a piecemeal revenue grab.

Although some individual taxpayers would be affected, there should be no doubt that superannuation funds are the main target of the grab, and that the context for it is the constant peeling back of superannuation tax concessions since about 2012. The Coalition government itself bears responsibility for the biggest change in the form of the 2016 budget package of restrictions.

May be more to come

But even if the Coalition is willing to stop there, Labor isn’t. Taking away refundability of franking credits is an indirect way of further curbing the benefits of the Howard/Costello changes of 2007. Labor retains a view that superannuation is too lightly taxed, and restoring double taxation of dividends for some super funds is just another way to skin the cat.

The superannuation community should already be alarmed, but there may be more to come. In a recent speech, Bowen characterised tax-free superannuation withdrawals from age 60 as part of what he called the “Howard era largesse” that remains, in Labor’s view, to be whittled away.

The Opposition’s move to withdraw refundability of franking credits should also be seen as part of a stream of soak-the-rich policies. Others include an increase in the top marginal rate of personal income tax, a 50 per cent increase in capital gains tax and a Medicare levy hike confined to incomes over $87,000.

This all fits in with the inequality narrative in a world currently obsessed with inequality, real or imagined – and never mind the disincentive effects of more progressive taxation. Bowen claims it is all needed to undo the Howard era “largesse”. But the only largesse is in Labor’s own spending plans.

Robert Carling is a Senior Fellow at The Centre for Independent Studies