This year is a federal election year, which could be a time of change for self-funded retirees should the current Party in leadership, the Liberal National Party, not get the votes they need to stay in power.
We are now in the months leading up to the election, which is typically the time when each Party stats their plans and proposed changes should they win.
The Labor party has announced that if elected, it will make changes to the dividend imputation credits shareholders of companies currently receive. What does this mean and how will it affect current self-funded retirees and those saving for retirement?
Darren Laudenbach, founder of God’s Money Matters who has worked for over three decades as a Certified Financial Planner, spoke with Neil Johnson on Vision Christian Radio’s 20Twenty program about the proposed changes.
“The Australian Stock Exchange is a lot of listed companies where Aussies own shares on the share market,” Darren explained. “For Australian owned companies, they pay taxes at 30%. So what happens when a company generates income, is it pays that 30% tax to the government or up to 30% to the ATO. Once that income tax is paid, what they do is then distribute a dividends to shareholders. So that’s the dividend that anybody who owns direct shares would be familiar with.”
“What happens with that, is when they get that dividend, they’ll only ever receive 70% of it. So if there was a dividend paid of $100, or [profit] of a hundred dollars generated by a company – $30 is sent to the ATO and $70 is sent to the shareholder. When the shareholder reports that income, they report a whole one hundred dollars, even though they only receive seventy dollars. So, the $30 becomes a franking credit, or a tax credit against any other income that they might receive.”
“What the current policy does is ensures that there is no double taxing. So therefore, if it’s already taxed by the company and they pay me a dividend as a shareholder, I’m not paying tax again on that income – up to that limit of 30% which the company has already paid.”
Proposed Changes by the Labor Party to Abolish this Policy
Darren Laudenbach then went on to explain what the financial implications will be if the Labor Party abolishes this policy and starts double taxing self-funded retirees.
“It will mean that we will have a double tax on dividends – both the companies will pay it and then the individual shareholder. Once they’ve received their $70 and their $30 tax credit, if their tax rate is below 30% then they will not receive a refund. Whereas, at the moment they would receive a refund. If their tax rate was 20%, then they would have received a 10% rebate. We’re going back to double taxing.”
The changes will not affect retirees on a pension, but the double-taxing will have a big impact on self-funded retirees, who are often shareholders in companies and source their income through dividends.
“Anyone on a full or part pension will still receive the full imputation credit. Whereas, if you’re a self-funded retiree and not receiving any pension, then you won’t receive the credit. Those with self-managed super funds, large superannuation funds or those who are not paying any tax and not receiving any pension will be the ones who are most effected.”
Labor proposes to raise more than $10 billion in the first two years if elected, and more than $50 billion over a decade. Is this additional revenue going to be sourced from the savings of retirees?
“[Labor] has probably modelled it assuming that Australians will continue to hold the same amount of shareholdings as they do currently now. Whereas, if you’re a self-funded retiree and not on an aged pension and they suddenly change the imputation credits, it wouldn’t be unreasonable to assume that a lot of retirees will readjust their portfolios to hold less Australian shares. Australian shares won’t become quite as attractive and therefore they might own more foreign companies because they’ll be looking for more of a growth profile rather than an income profile.”
In the 20Twenty audio clip below, Neil and Darren also discuss the implications of Labor’s proposed changes on charities and churches.
About Darren Laudenbach
Presenter, Speaker, Trainer, Author, Mentor, Coach, x-Financial Planner, Company Director, Shareholder – DipFP, AdvDipBus, Cert IV Financial Services (finance / mortgage broking), Cert IV Life Coaching.
Growing up in a Christian home was definitely a blessing for Darren – he committed his life to Jesus in his mid-teens. Influenced by his dad’s 40 year career as a financial planner Darren entered this profession and in 2001 reached the highest level as a Certified Financial Planner.
Darren’s passion is to help Christian’s master their money – rather than being mastered by it. This has proven to lead households into a position of control of their finances and enjoy the peace of financial freedom. At the same time a good example is being set for children, friends and the community to emulate (salt & light).
Darren is a husband, a father of two daughters, is active in his local church as a Boys’ Brigade Officer, Former Church Treasurer & Board Member, and is involved with various community and youth projects.
Featured image: Shutterstock.