Possible Changes to Imputation Credits

With the Federal Election happening this year, the recent proposals and changes to the franking credits system from the Senate Standing Committee which is looking to remove refundable imputations credits for certain taxpayers has attracted much attention. Many CPA Australia members are quite concerned about this proposal and changes to the eighteen-year policy that’s currently in place.

The Economics inquiry into the implications of removing refundable imputations credits has received about one thousand submissions so far but have yet to come across one that is supporting the proposals for this change in the removal of refundable imputations credits for certain taxpayers.

At the current state, superannuation funds and retirees that are currently in receipt of pensions are exempt from income tax. This is why imputation credits are crucial for these tax payers as in many situations, they form an important component of and investor’s overall return on their investment yield and overall investments.

As such, many CPA Australia members have advised that they are very concerned about this proposal of change to remove refundable imputations credits for these taxpayers as they would reduce investor returns.

This concern for this proposal also speculates that if such a change was put into place, it would essentially separate between the big earners and the average public. For example, the change to remove refundable imputation credits could mean that industry and retail superannuation funds, as well as those of high income earners will be able to use their franking credits to offset other tax liabilities, while certain other self-managed superannuation funds and lower income investors, including pensioners, would not receive the same benefits and may possibly have to pay more tax.

A lot of CPA Australia members that are unsupportive of this proposal to remove refundable imputation credits have also drawn attention to the face that the high-income earners and industry superannuation funds will have the option to be open to other areas of tax-exempt, including but not limited to religion, education and health institutions amongst others.

For the low income earners and those with Self-managed superannuation funds, removing the refundable imputations credits for them could possibly mean that they have to pay more tax – setting them at the tax rate of 27.5 per cent even though most of the taxpayers that fall into this category are actually paying a lower marginal rate right now, and some even nil. This change could possibly damage their opportunity to be able to provide for their own retirement and/or discourage them to actually be bothered to provide for their retirement.

Further to add onto these changes, investors are also challenged by the limited choices of investment products in Australia. Generally speaking, your average mum or dad investor only have three investment choices – they can either invest in assets that will derive interest, rent or dividend income, or hybrids thereof.

There are also speculations that should the removal of refundable imputation credits actually come into place, many taxpayers may look to seek to shift their self-managed superannuation fund investments into a larger fund or out of their superannuation altogether. Such a move, however, may also end up depleting their retirement savings by crystallising capital losses that they will never be able to offset against any future possible capital gains. Furthermore, given the nature of the returns are quite low, it is highly unlikely they will be able to switch to cash-based products or property investments.

The proposal for changes to the franking credits system, in particular the removal of the refundable imputations credits is a situation that can not be viewed in isolation, however. At the time of writing, another policy proposal exists which suggests ton halving any future capital gains discounts for investors which, if implemented along with the refundable imputations credits removal proposal, this could cause further damage and further discourage the average investor to invest and self-provide for retirement.

Currently, it’s not all bad news however, as members of CPA Australia have started to suggest tweaks to this proposal in hopes that the Senate Standing Committee will listen. Changes such as having annual caps for taxpayers on refundable imputation credits or specifically dealing with those that are exploiting the current system seem a little more realistic and fairer.

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