Labor Takes A Step Back On Banning The Benefits Emerging From Franking Credits

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Australian Economy, Macro Economics

While the daily hustle bustle with market volatility has been troubling investors in Australia, the recent jolt came in when Labor proposed to ban the benefits of franking credits under which shareholders will not be able to receive the refund from the Tax Authorities when their franking credits are higher than the actual tax they pay. This though hinges on the election of the labor in the next federal round, the move was indicated to attain a saving of about $5.6 billion in its first year of change and of about $59 billion over the decade. The proposal led to a wave of unrest among 300,000 of the retired people who belong to low income background and depend upon the cash refunds for their livelihood.

However, in a further statement, Labor leader Bill Shorten announced that it intends to exempt the low-income pensioners, who will be able to continue enjoying the benefit of receiving the cash refunds. The party has further mentioned that self-managed superannuation funds with at least one pensioner or allowance recipient before March 28, 2018 will also be exempt from the changes, and thus every pensioner will still be able to benefit from cash refunds. This, of course, would lower the saving that was expected earlier.

Labor thus seemed to have tweaked the stance a bit considering that about 14,000 of full-rate age pensioners, 200,000 of the part-time pensioners, super funds and self-funded retirees will be affected by the changes in the dividend imputation policy. Sentiments of the people were seen to be hurt as the earlier proposed plan started to shake common man’s confidence with regards to financial plans for their retirement. Particularly, market estimates that the changes on implementation can impact the after-tax returns for the individuals who have share portfolio of about $500,000 to decline by 132 basis points on an assumption if the portfolio earns a net yield of 4 per cent. Further, annual returns of self-managed super funds will reduce by 171 basis points under the same assumption.

The policy of scrapping the franking credits was criticised by the Government on the grounds that pensioners and retirees who are totally dependent on the cash rebates which are attached to the company’s dividends, will be deeply impacted. While it is hard to say that Labor party’s retreat on this cash refund banning might help in vouching for extra votes, the whole scenario has not gone too well with the investors. As a result, high yielding stocks like Telstra and National Australia Bank Ltd. have been seen to feel the brunt of this development.


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