Pensioner Guarantee: the Loophole Within the Loophole

Article published 23 April 2018

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In Australia (and only in Australia), you receive cash for excess tax credits.

Anyone with investments other than money-in-the-bank or a rental property could be affected by the federal Opposition’s proposal to abolish cash refunds of dividend tax credits.

If you have shares paying a franked dividend, you get tax credits.
Super funds (retail, industry and self-managed super funds) get tax credits.

The idea of the tax credit is that it reduces your tax. But what if you or your fund pay no tax? What if you pay less tax than you get tax credits?

In Australia (and only in Australia), you receive cash for excess tax credits.

If you or your fund own shares in a company, the dividend paid by that company is paid from after-tax profit. The company has already paid 30 per cent in company tax when it pays out its dividend.

This is the reason you get a tax credit. You, the owner of a tiny part of the company, don’t have to pay tax over the company’s profit again.

But if you don’t otherwise pay tax and get those tax credits in cash, it means the company pays no tax at all over the profit it paid out to you as a dividend. And it’s not the company that gets a tax refund. It’s you.

Tax credit cashbacks mean that company profits used to pay dividends are taxed at the marginal tax rate (and often that rate is zero per cent) of its shareholders. That is not how it’s supposed to work.

CPSA generally supports proposals to close tax loopholes, but when the federal Opposition announced its policy to abolish cash refunds of dividend tax credits, it said that this policy would have some unintended consequences.

Because although the dividend imputation reform would most dramatically affect those at the top, retirees on low to modest incomes also stood to lose a significant proportion of their income.

That is why CPSA welcomed the federal Opposition’s subsequent announcement of its Pensioner Guarantee that all pensioners would be exempt.

It was always clear that those with limited shareholdings and limited scope to change their investment strategy would be significantly disadvantaged without the exemption from a no-cashback policy on dividend imputation.

Under the Pensioner Guarantee, cashbacks would continue to every recipient of an Australian Government pension or allowance with individual shareholdings.

This would include individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.

Self-managed Superannuation Funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

The federal Opposition said that this policy would commence on 1 July 2019.

CPSA notes that, except for another double dissolution election, the next election must be held on or before 2 November 2019.

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