The recent Federal Budget included changes that will affect investors. Labor’s plan to ban the refund of franking credits contributed to the party’s 2019 election loss. During this year’s election campaign Labor said it had abandoned that policy.
It has, but it’s been unable to leave franking credits alone. The Budget proposes to reduce the availability of franking credits to investors. Franking or imputation credits arise when companies pay tax on the profits they make. As they pay their taxes, they accumulate credits.
Companies usually apply their after-tax profits in two ways. Most pay some of the net profits to shareholders as dividends. The shareholders also get the associated tax credits. If they pay little or no tax, the credits are refunded to them.
The second way companies use after-tax profits is to fund growth and expansion of the business. When they do, no-one is entitled to the franking credits relating to the tax paid on that profit. They accumulate in the company.
Some companies have developed smart ways to distribute those tax credits to shareholders who want them, such as buying their shares back and paying partly with franking credits. The Budget plans to outlaw that practice.
Franking credits on normal dividends are not under threat, but those distributed in any other way are. It will be interesting to see if the proposal passes through Parliament.
The minimum age for people to make downsizer super contributions from the sale of their home will drop from 60 to 55. If the conditions are met, such as the home being owned at least ten years, each seller will be able to contribute $300,000 from the sale into super.
The deeming rates used in the pensioner Income Test will be frozen at 0.25 per cent and 2.25 per cent until June 2024, not rising with interest rates. This will help those whose pensions are Income Test limited, but the majority of pensioners are Assets Test limited.
When pensioners sell their home the proceeds are exempt from the Assets Test for one year while they find a new home. That will be extended to two years. During that time the proceeds will be assessed as earning only the lower 0.25 per cent deeming rate in the Income Test.
Two other changes previously mentioned in this column were confirmed. The Income Test for the Seniors Healthcare Card will increase. Single retirees with income up to $90,000 per annum and couples with income to $144,000 will be eligible. In this financial year retirees will be able to earn an extra $4,000 from working and keep their age pensions. Up to $11,800 of work income will be exempted.