Would Labor’s proposed changes to dividend imputation matter to you?

Federal Labor has announced that, if elected to government, they will legislate to end cash refunds of imputation credits on dividends paid by Australian companies. While this is potentially a big deal to some people – it must be if it is going to save $59 billion over a decade – the majority of people won’t be impacted. While it is claimed that those most impacted would be wealthy retirees, there is acknowledgment from Labor that many low and medium income people would also be impacted.

Background

Dividend imputation was introduced by the Hawke/Keating Government from July 1987. Prior to that company profits in Australia were effectively taxed twice; first as company tax on the profits made by a company, and secondly, if the company paid out its profits as dividends to Australian shareholders, it was taxed again at the shareholder’s personal income tax rate. Introduction of dividend imputation (‘franking’) credits meant tax already paid as company tax were available to Australian shareholders to eliminate or at least reduce that double taxation.

If your personal marginal tax rate is above the tax rate paid by the company, which is typically a maximum of 30%, you pay personal income tax on dividends received at the difference between your marginal tax rate and what the company has paid. If the tax paid by the company is higher than your marginal tax rate then you can use the excess to reduce income tax payable on other taxable income, such as wages and interest. It is not proposed to change this.

However, not all people could utilise their franking credits because they had a low income tax liability or no income tax liability at all. In 2000-01 the Howard/Costello Government introduced cash refunds of excess franking credits i.e. a refund of company tax paid to people, such as those receiving tax free pensions in retirement, who couldn’t use the franking credits they received to offset a tax liability. These refunds are what Labor proposes to eliminate.

Who will be impacted?

Australia’s superannuation system means there is a substantial and growing amount of savings subject to income tax rates on earnings of a maximum of 15% (money in accumulation) or 0% (money in pension mode). As a result, the effective tax rate on a significant percentage of Australia’s corporate profits is 0% or 15%. This clearly has big implications for the Federal budget.

The proposed changes won’t impact anyone, including high income earners, who can use their franking credits to offset tax payable on other income but it will impact those paying low or no personal income tax. A significant number of people, particularly retirees, invest in companies such as the banks for dividends and the franking credits they receive are a sizeable proportion of that total income. Under the proposed changes they will lose a part of that income if they or their super fund are not paying significant income tax. This will reduce their income irrespective of whether they are wealthy or not; it is estimated that more than 200,000 Age Pensioners will be impacted and nearly one million people with taxable income of below $37,000. Retirees taking pensions from Self-Managed Superannuation Funds (SMSFs) are expected to be amongst those most impacted if the changes proceed. Not coincidentally, in my view, pension phase members of growing funds with many members in accumulation mode, such as many industry super funds, are not expected to be impacted even if they have large account balances.

For what it is worth, I think a fairer proposition, if there is to be a change, would be to continue with the current system but to limit refunds to some reasonable number – perhaps $10,000 per year per person – and to apply it equally to everyone regardless of their level of taxable income or the super fund to which they belong. This would help minimise the adverse impact on people who have structured their affairs under the current rules while limiting large tax refunds to wealthier individuals.

Income Protection Premiums – why are they rising?

Insurance premiums, particularly for Income Protection cover, have been increasing significantly over the last couple of years. Why is this happening? There are several reasons, in particular a higher level of claims for things like stress and anxiety.

Insurance pricing is cyclical because as competition grows, prices tend to fall. Sometimes they can fall to unsustainable levels for a period of time before market forces bring them back to a level that’s more sustainable over the long term. Most insurers say they have been losing money on Income Protection policies in recent years so to some extent that is behind recent price increases.

Another factor to consider when it comes to premiums is the changing profile of Income Protection claims. Claims these days are no longer dominated by short term injuries from “blue-collar workers”. The awareness and acceptance of mental health, especially among professionals, is a growing trend and is leading to more claims.

Level Premiums are also increasing:

There is a general misconception that a level premium insurance policy should never go up. While a level premium policy doesn’t go up with age like a stepped premium policy (the likelihood of a claim typically increases as we get older), it is still subject to the vagaries of the overall claims experience.

Level premium cover can also be impacted by interest rates. The interest rate environment and the income earnt to support the product is a significant factor for insurance companies in setting level premiums. As level premium policies age the cost of paying claims is higher than the premiums being received. As a result, product providers build reserves to account for those future claims. Low interest rates in recent years mean that insurers have been earning less interest on those reserves and therefore, more is needed to be put aside today to help fund current and future claims.

For Women: Balancing Work and bringing up Children

Nicolette Rubinsztein has built her career as a senior financial services executive and non executive director – all while working part time and caring for three young daughters. She shares her seven strategies for balancing a successful career and parenthood.

7 strategies to find your flex

Nicolette used her corporate expertise to find a solution to managing work-life balance, based on McKinsey’s 7S Framework.

  1. Shared Values

What will make you happy? And what will make your family happy? The answers may be different for everyone, but Nicolette says it’s important for partners to be on the same page. “You and your partner need to discuss and agree how you will approach parenting and work. Having the support of your partner is critical to enabling you to succeed as a career mum or dad.”

  1. Structure

How will you structure your life? Are you able to work part time, or job share? Or work from home? “I’m a fan of part time – it lets you keep a foot in the career door and stay up to date. But it can be financially challenging.” “In an ideal world, I’d like to see a model where both parents work part time – that would be much more sustainable. Running two full-on careers in one household is very tough,” says Nicolette.

  1. Style

This is all about creating a brand that enhances the perception of value to your business – building up brownie points that you can cash in for greater flexibility. “Make sure you’re a star before you go on maternity leave, so you are in a stronger position to negotiate when you return. One way to do this is to build relationships by staying in the same company for a few years before you start a family.”

  1. Skills

“Statistics show that having women in the workplace reduces risks, boosts morale and lifts profits and brand image – so don’t be afraid to be yourself.” Her advice is to use your skills and plan ahead of time so you are in the right role, with the right company and the right boss. This will make negotiating part-time arrangements easier.

  1. Strategy

Childcare strategy is a key element of success – and a bit of a jigsaw, Nicolette says. “You’ll probably need a combination of both parents, day care, grandparents or babysitters to fill in the childcare gaps.” “But try not to overuse day care if you can help it, and make sure you have one on one time with your child every day.”

  1. Staff

Nicolette says it’s important to get help with everyday tasks, to free up valuable time at home. “Your partner will generally be the first port of call – but, if you can afford to, outsource some domestic work to create more time for work and family.”

“There are plenty of men and women in high powered jobs and children that are still doing their own cleaning. This may work for a while, but it’s ultimately unsustainable.”

  1. Systems

Your systems can help keep you organised – whether it’s synched calendars to help you and your partner manage your time, a detailed ‘to do’ list, or online groceries delivered every week.

You can find more about Nicolette’s strategies for success at her website or in her book Not Guilty – a practical guide for juggling a family and corporate career to find genuine work/life balance.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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