Example Showing Unfairness & Discrimination – Labor’s Policy.

This example is based upon a retiree, with no pension or superannuation. We

have based the example on a sample income of $40,000 which could be
either a franked share dividend, OR interest received from some interest
bearing deposit.

For simplicity, we have assumed there is no other income. The total is

$40,000 from either dividends, or interest.

Using the ATO's "Resident tax rate 2018-19", the tax which must be paid by
the retiree is $5,347 including Medicare Levy. This amount of tax is payable,
under today's rules, whether the retiree receives the income as dividends or
interest.

So either way, the retiree receives $34,653 after tax.

Example Showing Unfairness & Discrimination – Labor’s Policy.

Under Labor's franking policy, the retiree is now forced to pay $12,000 tax if
the income comes from dividends, but still only $ 5,347 if the income comes
from interest.

That's a 124% increase in tax on the dividend income, but a 0% increase in

tax for interest.

This will skew investment choices, do you think ?

How does such an idiotic outcome occur ?

To see how, we need to consider how the tax on

dividends is paid today, under our existing
imputation system.
Example Showing Unfairness & Discrimination – Labor’s Policy.

Under the existing system that dividend is paid in 2 parts, $28,000 goes to
the retiree, and $12,000 goes to the ATO.

But because the tax is only $5,347 and the ATO has received $12,000, the
ATO currently refund the over-payment of $6,653 to the retiree. So the ATO
still retain the $5,347 tax, and the retiree receives the $34,653 net income, as
$28,000 from the dividend payer, and $6,653 from the tax office.

So under our existing system, it all works out perfectly.

Except now, Labor come bumbling along, and decide it would be nice to
confiscate the retiree's tax refund of $6,653. The policy is no more technical
or sophisticated than just pocketing people's tax returns.

So now it is easy to see that under Labor's dumb plan, the ATO would deduct
the $5,347 tax from the $12,0000 paid to it, and pocket the rest.

So the poor old retiree has to pay $12,000 tax, or, more accurately has paid
$5,347 tax and had the tax refund of the over-paid tax of $6,653 stolen.

So, effectively, $12,000 tax is paid on the dividend, but only $5,347 tax is
paid on the interest.

Another Example:

This example is useful to consider a self managed super fund (members in

pension phase) receiving either a $40,000 dividend or interest income.

Since the fund is in "pension phase", no tax is paid on either the dividend or
the interest under the current rules.

But, with Labor's policy, in the case of the dividend income, the entire
$12,000 would be confiscated by Labor.

So the situation for a SMSF is even more bizarre. The fund would pay, by
having its refund stolen, $12,000 tax on a $40,000 dividend, but $0 tax on
$40,000 interest income.

Only Labor, and its economic dilettantes could come up with such an
amateurish tax policy.

Authorized by : John Griffith Newcastle NSW

There’s No Difference Between A Cash-Refund And A Tax-Offset.

The proponents of the removal of refundable franking credits seem incapable

of comprehending that from a budgetary point of view there is no difference
between refunds and offsets. They want to eliminate refunds, but still allow
franking credits as tax-offsets.

There is absolutely no difference between giving a $10,000 tax refund to

taxpayer “A”, or allowing taxpayer “B” a $10,000 tax offset, and allowing B to
pay only $ 5,000 of a $15,000 tax bill.

In the absence of allowing B the offset, the whole $ 15,000 would be payable
in full.
Consider the following comparison.

Cash-Refund.

A $10,000 cash-refund,

1. Involves the payment of $10,000 cash to the shareholder, but

2. Does not reduce present, or future, tax receipts by the ATO.

Tax-Offset.

On the other hand, a $10,000 tax-offset,

1. Reduces the immediate, or near-future, tax receipts by the ATO by the

value of the $10,000 tax-offset.
2. Does not require the payment of $10,000 cash to the shareholder.

From a budgetary point of view, there is no difference, so why remove one?

Why remove either ?

Shareholders are already paying full tax at their marginal tax rates now
anyway.

There is a special case where ALL the tax paid to the ATO is refunded to
the shareholders, meaning that the ATO retains no tax at all with respect to
a specific dividend. However, even in such cases, Imputation is working
perfectly. The tax is being paid at the shareholder’s marginal tax rate, as set
by Government, which is 0 %.

There is a erroneous belief by the supporters of the removal of refundable

franking credits that “tax-offsets” are OK, but “cash-refunds” are not.

It is an arithmetic reality that paying out $10,000 is the same as receiving

$10,000 less. As shown above.

The other reality is that our tax system requires that the dividend receiving
shareholder is responsible for payment of tax on share dividends, and not the
dividend payer. This is consistent with Australia’s wider tax convention that
income tax is paid by the receiver, not the payer.

Furthermore, it is a well established principle that dividend receiving

shareholders pay tax on their dividends at their scheduled marginal tax rates.

So it is simple to understand that the pre-paid tax held by the ATO with
respect to a particular dividend may be more, or less, than the dividend
receiving shareholder’s ultimate tax liability.

In cases where the pre-tax held at the ATO does exceed the shareholders tax
liability, then the over-paid tax clearly needs to be refunded.

Once the over-payment has been refunded, the ATO will still retain the
correct tax payable based upon the shareholder/ taxpayers marginal tax rate
as scheduled by government.

It is a well established principle in taxation, retail, commerce, etc that all

overpayments be refunded by the receiver to the payer. This should be no
different in the case of share dividends.
Let’s be very clear, the imputation system, including refundable franking
credits does not set, or influence the amount of tax paid by any taxpayer.

The total tax payable is determined by the amount of the dividend and the
receiving shareholder’s marginal tax rate.

So a tax-refund to a shareholder does not mean that less than the correct
amount of tax is paid by the shareholder.

Similarly, if additional cash is paid by a shareholder to the ATO, that does not
mean that more tax than the correct amount of tax is paid by the shareholder.

Refundable franking credits, for example, are only a tool to adjust the amount
of pre-paid tax with respect to a dividend to equal the tax liability of the
receiving shareholder.
Labor would like you to believe otherwise, but the fact is it belongs to the
shareholder. The tax was initially paid by the dividend paying company, but it
was subsequently "imputed", or transferred to the shareholder when the
dividend was paid.

Whose Tax Is That ?

In Imputation, the tax pre-paid by the dividend paying company and held by
the ATO belongs to the dividend receiving shareholder.The Processes
involved are detailed below.
The tax belongs to the shareholder as detailed below.

1. Distribution Statement.
When the dividend paying company pays the dividend to the receiving
shareholder, the company provides a "Distribution Statement" to the receiving
shareholder. The statement shows the value of the tax transferred, or
"imputed" to the shareholder. The value of tax transferred is also referred to
as the "franking credits".

2. The Value Of The Tax Is Deducted From The Shareholder's Dividend.

The receiving shareholder does not receive the full dividend in cash from the
paying company. The paying company deducts the value of the "franking
credits" from the "gross dividend", and pays the shareholder only the "cash
dividend".

The cash dividend received by the shareholder, plus the value of the tax
transferred to the shareholder (the "franking credits") as shown on the
distribution statement, equals the "gross Dividend". So the shareholder has
now "paid the tax by cash deduction" from the dividend.

3. Shareholder Must Pay Tax On "Gross Dividend".

The receiving shareholder, whilst only receiving the "cash" dividend is

required by law to include the "gross" dividend as taxable income, and pay
tax on the "gross" dividend at the shareholders marginal tax rate.

The Tax Belongs To The Shareholder

For the three reasons detailed above, the tax held at the ATO belongs to the
shareholder. Therefore if the tax held at the ATO exceeds the tax liability of
the shareholder, the overpaid tax should be refunded to the shareholder.

The refund of overpaid tax to taxpayers is a well established convention in

Australia.

The Refund Belongs To The Shareholder

So, should the tax be over-paid, and so exceed the total tax liability of the
taxpayer, the excess tax should be refunded to the taxpayer. Just as it has
always been refunded. BUT, Labor's brutal, unfair and discriminatory policy is
to simply confiscate the refund from the taxpayer.

So the tax has been over-paid by the taxpayer, but Labor won't give it back.

Authorized by John Griffith Newcastle NSW

Labor’s Franking Policy Favours High Income Earners.

Despite Labor’s claims to the contrary, those individual taxpayers on high

incomes are not disadvantaged by Labor’s Franking Policy.

As shown on the following table taxpayers with taxable incomes above about
$140,000 are able to simply offset their franking credits against their tax bill,
and so retain the full benefit of their franking credits.

Taxpayers on lower incomes are not so lucky, under Labor’s policy.

For example, a taxpayer with $20,000 of taxable income ( all share

dividends) will pay $6,653 extra tax, above the ATO’s own tax tables.
 The table above showns

Extra Tax Payable Under Labor’s Policy.

Labor’s policy will not affect taxpayers on high incomes ( say $140,000 and
up), because these tax payers will still be able to retrieve all their franking
credits as tax-offsets.

As we have shown elsewhere, there is no difference, from a budgetary

point of view, between a tax-offset and a tax-refund.

1. A Tax-Offset : Reduces the immediate, or near-future, cash tax receipts by the

ATO by the value of the tax-offset.
2. Does not require the payment of any cash to the shareholder.

1. A Cash-Refund : Involves the payment of cash to the shareholder, but

2. Does not reduce present, or future, tax receipts by the ATO.

Referencing the table, column 2 shows the tax payable for the taxable
incomes in column 1. That tax is currently payable if that income is earnt as
share dividends, interest income, or from working.

If, the income was all earned as share dividends, column 3 shows the value
of the attached franking credits generated.

Column 4 shows the tax lost by the taxpayer, by Labor’s ill-conceived

removal of refundable franking credits.

It’s plain to see that lower income earners are the most affected, starting from
an EXTRA $5,258 being confiscated from a $20,000 dividend.
 The table above showns

Special Case : Taxpayers with 0% Tax Rates.

There is a special case where ALL the tax paid to the ATO is refunded to
the shareholders, meaning that the ATO retains no tax at all with respect to a
specific dividend.

Under existing Imputation there are cases where all the tax paid to the ATO
with respect to a particular dividend is refunded to the shareholder. This occurs
when the shareholder has been given a 0% tax rate by Government. Members
of all super funds in “pension phase” have a 0% tax rate, as have low income
individuals earning below the tax threshold.
Supporters of the denial of tax refunds for over-paid tax ( aka “the removal of
refundable franking credits”) point to these examples of no tax being
retained by the ATO and fallaciously claim that Imputation needs change, and
that therefore tax refunds for over-paid tax (“refundable franking credits”)
should be removed.

However, the real reason the ATO refunds all the tax and so retains no tax in
these cases is because the Government gave the taxpayer/ shareholders a 0
% tax rate.

When the government sets the tax rate for a taxpayer at 0 %, two things
happen,

• The taxpayer pays no tax on income, and

• The ATO receives no tax on that shareholder’s income.

So the tax refund is simply mirroring government policy of zero tax with
respect to a particular taxpayer group.

So even in such cases, Imputation is working perfectly. The tax is being paid
at the shareholder’s marginal tax rate, as set by Government, which is 0 %.

The distinction between the Zero Rate of tax given to some taxpayers, in
combination with the imputation confuses some. But the issues are
completely different, and unrelated.

For example, if a self managed super fund with members in pension phase,
(0% tax rate), received a $40,000 interest payment, it would pay no tax. That
would not be remarkable. No tax was payable, and no tax was paid. Simple.

Furthermore, since the interest payment by the interest payer would be tax-
deductible, the payer would not pay tax on that $40,000 either.

In the case of a $40,000 dividend, only $28,000 is paid directly to the

receiving shareholder, and $12,000 is paid to the ATO.

It’s not hard to see that because of the Zero tax rate of the receiving
shareholder, that $12,000 tax pre-paid to the ATO should be refunded, since
no tax is payable by that taxpayer.

Once that $12,000 has been refunded to the shareholder, the shareholder will
have then received the whole $40,000 dividend. This is exactly the same
outcome as for a $40,000 interest income. In both cases the fund has
received the $40,000 income.

In both cases, due to the 0% tax rate, the ATO has retained NO TAX in
relation to the $40,000 income. This is true whether the $40,0000 was
received as dividend income or interest income.

This is not a difficult topic, and clearly the refund of the $12,000 to the SMSF
is critical to that fund receiving the full gross dividend of $40,000.