The original imputation system
Under the original system, imputation credits could be used to reduce an individual’s tax liability. Much like other tax credits within the Australian Taxation System, if someone didn’t have a tax liability, or the tax liability was smaller than the imputation credits, the imputation credits went unused.
Changes to the imputation system
In 2001, the dividend imputation system was amended to allow any excess imputation credits i.e. those in excess of any tax liability, to be paid as a cash refund. This meant that those people with a tax rate lower than the company tax rate, generally 30%, would receive a cash refund where they had no other tax liability.
Let’s consider an example
The impact of the dividend imputation system, and the amount of any refund an individual will receive, will vary according to the amount of franked income received and the marginal tax rate of the individual. In the following example we will assume that a fully franked dividend is being paid to an individual (being a dividend on which the full rate of company tax i.e. 30% has been paid):
|Individual Marginal Tax Rates|
|+ Imputation credit||$300||$300||$300||$300||$300|
|Total assessable income||$1,000||$1,000||$1,000||$1,000||$1,000|
|- Less imputation credit||$300||$300||$300||$300||$300|
|Net tax payable||$0||$0||$25.00||$70||$150|
|Excess credits (refund)*||$300||$110||Nil||
*Where an individual’s tax rate is greater than zero, the amount of refund would firstly be used to reduce any other tax liability, with any remaining paid to the individual as a cash refund.
Considerations for superannuation funds
Superannuation funds generally have investment income taxed at a rate of 15%. Changes were introduced to the tax system in 2007 that resulted in payments from super to individuals over age 60 becoming tax free.
Further, the investment earnings a superannuation fund earns for any person receiving an income stream from their superannuation savings are also tax free.
So some super funds may not pay any tax if all their members are receiving income streams.
This effectively means that any investment a superannuation fund makes in Australian Shares, particularly for members receiving income streams, may currently result in a cash refund for the dividend imputation credits.
As a result, many older Australians, particularly those using self-managed superannuation funds, directly invest in Australian Shares given that any income they draw down will not only be paid to them tax free, but they could also receive a cash refund equivalent to the imputation credit amount (in the form of investment earnings) thereby increasing the effective yield from their investment.
Labor’s proposed changes
The Labor opposition has proposed that the changes introduced in 2001 would be reversed, meaning that the original imputation system would effectively be restored i.e. after 1 July 2019, any excess imputation credits would no longer be paid as a cash refund.
To ensure that the measure does not impact upon those receiving a government pension or allowance (including those receiving a full or part age pension, disability support pension, carer payment, parenting payment, Newstart or sickness allowance), Labor has announced a Pensioner Guarantee, meaning recipients will still receive any excess dividend imputation credits as a cash refund.
Labor sees this as a vital area of tax saving should it form government at the next federal election, with the current dividend imputation system forecast to cost more than $56 billion to the federal government over the next ten years.
Who will be most affected?
It is likely the proposed measures would impact greatest on self-managed superannuation funds invested primarily in Australian shares where members are in pension phase, and are not in receipt of a full or part government pension or allowance.
Impact to Sunsuper members
The full extent of the proposal is still largely unknown, and additional clarification is being sought by the superannuation industry. For members of superannuation funds like Sunsuper, however, any impact is expected to limited for three reasons:
- Most Sunsuper members are invested in one of our diversified investment options that include a much broader range of assets than just Australian Shares. These include international shares, cash, fixed interest, unlisted assets and property. Part of the reason for this diversification across various assets is to manage the investment risk, including the risk of any legislative change, of any particular asset class.
- Our investments are pooled meaning that all investment earnings, including dividend imputation credits, are applied across our more than one million members.
- In times when there are negative investment returns, such as in the GFC, imputation credits can be applied to reduce contributions tax otherwise payable by accumulation members.
Other important points
It is important to remember that, as the current debate is showing, this policy is not supported by the current government and would firstly require Labor to win the next election, which must be held by no later than 18 May 2019.
Secondly, any successful Labor government would need any proposals to pass through both the lower and upper house before becoming legislation.
Finally, as has already been demonstrated by the announcement of the Pensioner Guarantee, it could be expected that any final legislation may reflect further amendments to what has been proposed as Labor continues to consult with segments of the community.
What should I do if I’m concerned?
If you are heavily invested in Australian Shares, drawing an income from your super and concerned about the potential impact of the dividend imputation change should it become law, we encourage you to speak to a financial adviser to find out if your choice of investments is meeting your needs. You can start by calling Sunsuper on 13 11 84 .