How the Labor franking credit change affects working people

Fairfax Media Limited (ASX: FXJ) are reporting that Labor plan to remove franking credit refunds from the tax system.

Most readers are probably aware that franking credits are ‘attached’ to most Australian dividend payments. Franking credits are generated when a company pays tax and helps avoid company profits being taxed twice – which is the case in a lot of other countries around the world.

The franking credit is a refundable tax credit. This means the franking credits reduce taxes owed or generates a refund if the franking credit total is more than the tax charged.

Labor are proposing that if the tax result is a refund then the individual doesn’t receive the refund. However, franking credits will still reduce taxes owed.

Bill Shorten emphasised that people will not be paying more tax, “these people will no longer receive a cash refund – but they will not be paying any additional tax.”

Labor say that reforming the system will save the budget $11.4 billion over the final two years of the current forward estimates and $59 billion over the medium-term.

This will affect working people differently compared to retirees who are likely to be much harder hit. For people who work and hold shares in their personal name it may not be as bad.

Almost everyone who works for several days of the week will earn a taxable income more than $37,000, which is the tax bracket where the tax rate exceeds the franking credit rate of 30%.

This means that working people likely don’t receive pure franking credit refunds unlike retirees whose income is just franked dividends.

This will also likely affect people with private investment companies and people who take dividends from their small private companies.

Foolish takeaway

We will need to see the nitty gritty of Labor’s tax suggested tax change, but it appears as though working people will hardly be affected at all by this change. Although, there is a chance that working people may lose a small refund.

If Labor win the next election and if Labor implements this change it will become clearer how this will affect people’s tax positions.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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