Australia's Franking Credit Regime Is NOT at Risk

Getty/Mark Wilson

More than a few pensioners and investment analysts would have choked on their cornflakes reading the headline on the AFR online site this morning implying that Australia’s franking credit system is in for the chop.

Certainly the headline “Loss of franking credits would be a ‘travesty’” caught my eye.

But the reality is that the story is about the impact of the reduction in the company tax rate from 30% to 28.5%, in the 2015-16 financial year, on franking credits and therefore on franking incomes for Australian shore owners.

The reduction in the tax rate is purported to reduce cash flow to dividend recipients by around “7 per cent of between $75 billion and $100 billion in franking credits” – that’s somewhere between $5-7 billion.

Certainly that is a loss of income but it’s not a system at risk. The economist in me says that perhaps the loss in personal investment income might be more than offset by an increase in company profits and potentially higher payout ratios to compensate for the effect of the reduction in the company tax rate on dividends.

It is a complex interaction and the net result is likely to be some sort of redistribution away from franking credits, but this needs to be balanced against benefits elsewhere in the economy.

The good news for those dependent on franking credits for a share of their income is, for the moment at least, Australia’s franking credit regime is intact.

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