Franking credit refunds are one step closer to being removed

Credit: Tax

One of the recent pledges by the Labor Party if it wins the next election was that it would remove franking credit refunds. However, this wouldn’t apply to low-income retirees as well as every pensioner who is currently a recipient from a self-managed superannuation fund.

This idea will reportedly boost the budget by $10.7 billion in its first two years and an estimated $55.7 billion over the next decade.

Why is it closer?

Over the weekend Labor won the byelection seats of Longman and Braddon, registering a swing away from the Liberals.

Not only do the results suggest Labor could win the next election, it makes it more likely Labor will stick to its pledges as it could believe they are vote winners.

Even without franking credit refunds Australia would still have a very good tax system for shareholders. Plus, it could make businesses like Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) retain a bit more of their profit and re-invest it back into growing the businesses. This would be better for investors and the economy over the long-term.

However, this idea also punishes people who made investments into businesses under the current system. Changing the goalposts after you’ve already made choices seems quite harsh. In-particular, it could hurt dividend shares like Australian Foundation Investment Co. Ltd. (ASX: AFI) and WAM Capital Limited (ASX: WAM). Indeed, WAM is running a petition for the system to remain the same.

Ultimately, I think it would have been better to create a progressive tax system in the superannuation system, like the current system for regular individual taxpayers. It was clearly unsustainable to have more and more wealth tied up in a tax-free setup with the budget falling on a smaller percentage of working Australians.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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