Labor's plan to cut imputation credits will hit retirees and make shares less attractive

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Labor’s plan to abolish refundable imputation credits will hit retirees and everyone who has superannuation, according to the Financial Services Council and those who run self managed superannuation funds.

They say the move back to what is essentially a double taxation of company profits could also push investors out of the equity market and into property and bonds, putting upward pressure on home prices.

Dividend imputation, where those who receive tax paid dividends from their shares get a tax break, was designed to eradicate a form of double taxation.

The system was introduced in 1987 by the labor government of Bob Hawke to stop the effective double taxation of share dividends — the tax office would first tax the company and then the investor’s dividends upon which tax had already been paid.

Labor says killing off the cash rebates will save the budget $5.6 billion in 2020. The plan is to deny a cash refund to those whose imputation credit on their dividend is more than their whole tax bill.

The tax credits, which can be used to offset tax on other income, are seen as a major attraction of investing in Australian shares.

The Financial Services Council says Labor’s change would act as a tax increase for many retirees with shareholdings, penalising those who have saved for their retirement by investing in Australian companies.

Unintended consequences of the proposal could include retirees moving out of shares and into property and bonds, adding to house price pressures.

“The purpose of superannuation is to fund a comfortable retirement for Australians while reducing their reliance on the age pension,” says Financial Services Council CEO Sally Loane.

“Super policy is working, it has been gradually reducing national taxpayer expenditure on the age pension, but this mooted change could put the brakes on that.

“Constantly changing the rules and hitting retirees hardest will only undermine the purpose of superannuation, leaving more people reliant on a taxpayer funded retirement. If policy makers keep moving the goal posts Australians will disengage with the super system and stop contributing more to their superannuation.”

The lobby for self managed superannuation funds, the SMSF Owners’ Alliance, says Labor’s plan will make all 12 million Australians in superannuation funds worse off.

“It fails the test of fairness because it will benefit taxpayers on higher incomes at the expense of those on lower incomes,” says Michael Lorimer Managing Director at SMSF Owners’ Alliance.

“Taxpayers with an effective average tax rate of 30% or over will receive the full benefit of franking credits while those on lower incomes will lose out.

“The people who will be particularly hard hit are retirees in pension phase whose super savings are invested mainly in large corporations, like the big banks, miners and telcos, that issue franked dividends.

“As well as losing tax refunds, investors are likely to see the share value of these companies fall.”

Treasurer Scott Morrison says Labor’s proposal is to take away what the Government would normally give back because it’s tax that has been overpaid.

“If the Labor Party are prepared to double tax, to make you pay twice the tax that you should, if the Labor Party are prepared to deny you what is effectively a tax refund because you’ve overpaid your tax, where will they stop?” says the Treasurer.

“This is a Labor Party that is so addicted to higher taxes they’re completely off the leash. They have thrown away the rule book. They will call anything inequity now in the name of just jacking up taxes.”

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