The Labor policy to deny the refund of franking credits for individuals and SMSFs has received a notable amount of media attention. However, it seems a lot of people do not understand the policy, so we thought we would take the time to explain it. 

Firstly, for this policy to become law, it would depend on two things:

  1. Labor forming government at the next election
  2. The successful passing of this legislation through Parliament – this has a big impact on the composition of the Senate (if the Senate supports the policy)

Currently, if you receive franked dividends, the franking credits that are attached to the dividend can offset your tax payable and if you have paid too much tax, you can be refunded the cash when you lodge your tax return. This applies to all individuals and most entities that pay tax (including SMSFs).

Let’s assume that the above two conditions are satisfied. What does this policy mean?

Under the new policy, franking credits would be changed from a refundable tax offset to a non-refundable tax offset for individuals and super funds.

This means, for individuals and super funds, if you have paid too much tax because of franking credits, you would no longer receive a cash refund upon lodgement of tax returns. These franking credits cannot be carried forward and in effect will be lost.

There is a notable exemption – for pensioners who receive an Australian pension.

Lots of our clients receive refunds because of franking credits – both individuals and SMSFs who hold shares in listed entities; and individual and SMSFs who hold shares in related entities (often their own company).

Watch this space.