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Changes to Excess Franking Credits

Paul Money Partners > Blog > Changes to Excess Franking Credits

The Labor Party is proposing a ban on some dividend imputation refunds if it win the 2019 federal election.

The dividend imputation scheme was first introduced in 1987. The logic is that Australian company profits that are distributed as dividends should not be taxed twice (first at the corporate level and second at the shareholder level).

Imputed credits, equivalent to the amount of company tax already paid were attached to dividends. These credits, known as imputation credits or franking credits, could be used to offset an individual’s tax bill.

Originally, one an individual’s entire tax liability had been offset by the franking credits, any excess credits could not be claimed as a cash refund an were effectively worthless.

However, in 2001 a review of taxation changed the law to allow individuals and superannuation funds to claim ‘excess’ imputation credits as cash refunds. Therefore, if an individual or superannuation fund has imputation credits exceeding their tax liabilities, they are entitled to receive the difference as a refund. Following on from this, if an individual pays no tax they are entitled to a refund for all imputation credits received.

Under the Labor proposal, this would no longer be the case. The Labor party is promising to reverse the reviewed decision to allow cash refunds for excess imputation credits for most individuals and superannuation fund.

Labor’s policy does however, include a ‘pensioner guarantee’. Under this guarantee, some pensioners and allowance recipients would continue to be able to claim cash refunds for excess imputation credits, depending on circumstances.

Author: Ashleigh Truran-Johnson