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Shadow treasurer Chris Bowen has been called out over the figures used in his franking credit rhetoric, with one tax expert highlighting the mismatch in various scenarios.
Bowen’s franking credit figures pulled apart
26 April 2019
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8 minute read
Mr Bowen has gone on the record several times this year using the comparison of a nurse and a retired shareholder to highlight the inequitable scenario in a bid to sell its proposal to end cash refunds for excess dividend imputation credits.
“A nurse who earns $67,000 a year we charge $13,000 in tax. But a retired shareholder who has $67,000 in income we charge her zero tax and then write her a cheque for $27,000. That is not OK,” Mr Bowen said.
TaxBanter senior tax trainer Robyn Jacobson has since analysed those figures, noting that while they sound compelling to the average taxpayer at face value, there are several discrepancies that show the numbers do not stack up.
Ms Jacobson noted that the franking rate is too high if Mr Bowen’s remarks imply that the franking credit refunded to the shareholder is $27,000.
“Assuming that the income of $67,000 to which Mr Bowen refers is the taxable income — that is, the shareholder has the same taxable income as the nurse — then this includes the dividend grossed up for the franking credit, suggesting that the dividend (actual cash received) is $40,000 and the franking credit (notional assessable income) is $27,000.
“However, this means that the franking rate applying to the dividend is just over 40 per cent, which is not possible under the imputation rules.”
Mr Jacobson also noted that if one is to accept those figures provided by Mr Bowen, the refundable amount would not add up.
“The income tax the shareholder pays on the taxable income of $67,000 — before the franking credit is applied — is $14,132 including the Medicare levy and the LMITO of $530 (same as the nurse),” she said.
“Then the franking credit of $27,000 is applied which reduces the tax payable to zero, and produces an excess franking credit of $12,868. The amount refunded to the shareholder is the excess franking credit of $12,868, not the entire amount of the $27,000 franking credit.”
SMSFs
"If a SMSF held the shares, and all of the members were in pension phase, and none of the members has exceeded their $1.6 million transfer balance cap (which would cause the SMSF to pay some tax on the earnings attributable to the capital above $1.6 million held in an accumulation account and therefore affect the outcome), then the income of the SMSF would be tax-free, in which case the SMSF would receive a full refund of the franking credit... but the refund representing the excess franking credit would be $20,100, not $27,000," added Ms Jacobson.
In further analysis and using a maximum franking rate of 30 per cent, Ms Jacobson listed a number of scenarios to illustrate the correct figures that would apply:
- the taxable income is $67,000 — then the dividend is $46,900, the franking credit is $20,100, and the refundable tax offset is $5,968;
- the dividend is $67,000 — then the franking credit is $28,714, the taxable income is $95,714 and the refundable tax offset is $3,444;
- the dividend is $40,000 — then the franking credit is $17,142, the taxable income is $57,142 and the refundable tax offset is $6,411;
- the franking credit is $27,000 — then the dividend is $63,000, the taxable income is $90,000 and the refundable tax offset is $4,933.
Labor’s argument
The ALP argued that cash refunds for excess imputation credits are not sustainable for the national accounts.
In his original policy statement, Mr Bowen said that the concession costs the federal budget about $5 billion per year.
Further, the ALP believes the current franking credit system needs to have its policy intent realigned.
“A Shorten Labor government will close down the concession created by Howard and Costello, and return to the arrangement first introduced by Hawke and Keating — so that imputation credits can be used to reduce tax, but not for cash refunds,” Mr Bowen said.
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- Shocking that they are comparing apples to oranges in terms of situations. Not only is the math flawed but also the circumstances. The retired person uses that opportunity cost based on rate of return. The smart/ forward thinking will anticipate this change and plan for it i.e. invest in shares that either pay a higher rate of return unfranked or a seperate investment.
the worrying item would be if there is a large exodus in certain share markets, then it could spell problems for these businesses, which will most likely lead to job losses ultimately and unpaid entitlements.....can we really afford more of those?
Labor from my understanding is meant to help the working class.....what part of this supports working class? i dont see one aside from a quick election grab. I just wish the rest of the country knew this instead of going on face value of labors core "values".0 - What a flawed and simplistic explanation. Bowen seems oblivious to the fact that many nurses take advantage of salary packaging to take advantage of the $17,000 fringe benefit exemption rules. In addition nurses can work extra shifts to earn more income, especially those that attract Additional penalty rates. In addition wage increases occur from time to time. The self funded retiree does not have these benefits and risks losing capital and earnings even on so called blue chips shares. You need go no further than Telstra and the banks in the fallout after the banking inquiry.0
- John Hewson lost to Paul Keating for not being able to explain GST on a cake.
We can only hope Chris Bowen's abject inability to understand how the franking sytem works will deliver a similar blow to Labor aspirations.0 - Chris Bowen's inability to do the math is quite frightening!!!0
- The difference is, unless the retired person invests their hard earned dollars into business people wouldn’t he jobs...this argument is pathetic.
The nurse goes to work to earn an income BUT the retiree has already done the earning as well as saved for retirement & now invests.
This greedy Labor government wants business to run on freash air - dear go the stupidity ??? Cognitive skills limited & zero future panning ability.0 - disappointing article
The numbers stack up. If $63k is in SMSF, they get a refund of $27,000 and all that can be paid out to a tax-free retired individual aged over 65.
A simple statement, which doesn't need to be pulled apart.
So everyone, including nurses pay tax and retired people get reverse taxation... refunds for the wealth and everyone else keep paying more tax.
0 - What about the nurse who saves using FBT exemption and salary packaging which be a $10k per year benefit! Are all salary package deals going to up for grabs for health,education, police, fire,ambulance staff?0
- Depends on whether the franking credits have come through managed funds or not.0
- I too picked up on Bowen's interview with Leigh Sales on 7:30, 18 Feb. On that occasion with his "nurse" example, he said $65,000 instead of $67,000. Which I noted implied a franking credit of close to $27,000. So my take was that in his example, the $65k was the dividend net of co. tax (franking credit), so that he was comparing a net of tax dividend with gross of tax salary. Very deceptive. But he would have known that, and he knows how the imputation system works, so he is out and out lying. Pity help us if we end up with such a dishonest treasurer.
For what it's worth, I wrote an opinion piece on Bowen's example which I hoped would be published. But no luck. Anyway, here it is :
Bowen's Numbers Don't Add Up On Franking Credits
More than ever, the electorate requires factual information to make an informed decision on election day, and deceptive information needs to be filtered out. Like for example, Shadow Treasurer Chris Bowen’s interview with Leigh Sales on the ABC’s 7:30 Report, 18 February 2019, when he compared the taxation of a salaried nurse with that of an investor.
Mr Bowen said: “Well Leigh, take the example of a nurse, for example. A nurse working in the system, earning around $65,000 a year, working hard, pays about $13,000 a year tax. But a retired shareholder, paying no tax and getting $65,000 a year in income, we give a tax refund of around $27,000 a year. Same income but very different situations. The retired shareholder pays no income tax and receives a tax refund from the government."
Nice try Chris, but that sleight of hand needs to be exposed.
Straight away we have a problem. He is not comparing like with like, it is not the "same income". Accompanying the shareholder dividend of $65,000 is a franking credit of $27,857. So the investor's total taxable income is $92,857. A more valid comparison therefore, would be with a nurse earning $92,857 before tax.
Let’s assume then that the nurse earns $92,857 gross of tax. Then both her and the investor’s year-end tax liability will be the same because tax due does not differentiate by source of income, at least not for now. Tax due for both will be $22,717, meaning the investor is reimbursed $5,140 because he had the franking credit amount of $27,857 withheld for tax at the time the dividend was paid. Both therefore, with the same gross of tax income, taxed the same amount, end up in the same net of tax position. As they should.
Now let's dissect Bowen’s claims.
He said that the shareholder receives “a tax refund of around $27,000 a year”. Clearly that is not the case. On the contrary, the $27,857 is actually taxable income withheld for a possible tax liability, at the time the $65,000 dividend was paid. And this is in line with the essence of our imputation system, whereby company profits distributed as dividends becomes individual income for tax purposes. The tax withheld on the dividend, the franking credit, is acknowledged as shareholder taxable income.
He goes on to say, “same income but very different situations”. Again, that is not correct. He is trying to compare after tax investment income with before tax salary income. A distorted and invalid comparison.
Finally, he said, “the retired shareholder pays no income tax and receives a tax refund from the government”. Well clearly, the shareholder does pay income tax. $22,717 in fact. And he receives $5,140 from the ATO for an overpayment of tax at the time the dividend was paid. Of course the $5,140 would not be returned to the shareholder under Labor's franking credits policy, a loss of 7% of his income.
It is quite apparent that the difference between what Bowen claims to occur, and what actually happens in reality, could not be more stark. He is being disingenuous, targeting the financially unaware. And this is exactly the problem with the Labor Party franking credits policy. It is confusing to the electorate, and is a lever for the manipulation of public sentiment.
With taxation policy such a key point of difference between the Coalition and Labor, the electorate deserves, and is entitled to, clear and factual information without the chicanery. Because the last thing our country needs is a party elected on false pretences.
0 - It’s simple. The only reason why a shareholder would get a refund is if his/her personal tax rate is less than the company tax rate of 30%. If it’s higher than 30% he/she pays top up tax. By refusing to refund a shareholder whose tax rate is less than 30% effectively taxes them at 30%. How is that fair to low income taxpayers who are on less than 30% tax ? Labor is disadvantaging the very people they purport to support. It appears labor does not understand how franking credits work.0
