Many CPA Australia members are concerned by proposals to change the franking credits system.
The recent Senate Standing Committee on Economics inquiry into the implications of removing refundable imputation credits attracted much attention, and is certain to attract even more as Australia heads to a federal election.
The inquiry received about 1000 submissions, but I have yet to come across one that supports any proposal to remove imputation credit refunds for certain taxpayers.
The issue of refundable imputation credits has been amplified because for some years now super funds in pension phase, as well as many retirees in receipt of pensions, have been exempt from income tax. As such, fully refundable imputation credits in many cases now form a very important component of an investor’s overall return on investment yield, and overall return on investment.
CPA Australia has advised the committee that members are very unsupportive of any changes to the imputation system that would reduce investor returns.
We are concerned there is potential for a split system of haves and have-nots – the so called “haves” being industry and retail super funds, and high income earners who will be able to use their franking credits to offset other tax liabilities.
The “have-nots” would be certain self-managed super funds (SMSFs) and low income investors, including pensioners.
Members have also since drawn attention to the fact that the “haves” would include other tax-exempt bodies such as religious, educational and health institutions, among others.
Abolishing refundable credits for a very narrow group of taxpayers – individuals who are low income earners and SMSFs – will apply the punitive tax rate of 27.5 per cent on them, disregarding the fact that the taxpayer’s actual marginal rate may be much lower, or even nil.
Such a move would not only damage people’s opportunity to provide for their own retirement, but also further discourage them from doing so.
Saving for retirement
Coupled with other current relevant events in Australia such as the Productivity Commission’s review of superannuation and the Banking Royal Commission, people’s confidence in investing in markets either directly or more particularly via superannuation has already been considerably shaken.
The investor’s dilemma is further challenged by the limited choice of investment products for most ordinary Australians. Generally, most mum-and-dad investors have three investment choices. They invest in assets that will derive interest, rent or dividend income, or hybrids thereof.
CPA Australia members have advised that should the proposed policy proceed, many clients/taxpayers will seek to shift their SMSF investments into larger funds or out of superannuation altogether. However, this is easier said than done. For example, given the recent stock market downturn, such a move may also erode their retirement savings by crystallising capital losses, and for many these would be real economic losses that they will never be able to offset against future capital gains.
Further, given very low cash rate returns, they are unlikely to swap to cash-based products.
They are also unlikely to switch to property investments for several reasons such as lack of funds, no desire to borrow through complex loan/investment structures, and the current downward trend in the property market.
While it may be convenient to look at the imputation policy issue in isolation, rarely do events occur in isolation. Accordingly, CPA Australia also reminded the committee that currently there is also a separate policy proposal which, if implemented, would halve the future capital gains discount for investors – a proposal that would undoubtedly further discourage investment and self-provision for retirement.
The refundable imputation system has been in place for some 18 years, reflecting the policy that without refundable imputation credits, certain taxpayers could be unfairly paying tax at a rate higher than their actual marginal tax rate.
CPA Australia also told the committee that some members had suggested that if any change was to be made, annual caps should be considered for taxpayers – say A$15,000 or A$20,000 of refundable credits per annum – to ameliorate the impact of the proposal.
Perhaps more appropriately, a more holistic tax reform agenda could revisit whether the imputation system is still fit for purpose. Arguments have been advanced for many years that Australia’s imputation system is an impediment to foreign investment. Australia is one of a handful of countries left with a full imputation system.
It is also worth noting that some other tax jurisdictions have moved down different paths – for example, treating company tax as a final tax and company dividend income as exempt in the hands of the investor, or even capping the income tax rate on dividend income.
Further, if the dividend imputation rules are being exploited in ways the parliament did not intend, then this should be addressed via specific anti-avoidance rules or through the application of the general anti-avoidance rules.
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