Rich investors get lion’s share of $29 billion franking credits
Australia’s $29 billion system of franking credits for investors is skewed heavily to the rich and is ripping a hole in the budget, a new analysis has found, with one tax break found nowhere else in the world costing almost $5 billion a year.
Millions of Australians benefit from franking credits, which allow investors who receive dividends to claim a tax credit at the corporate rate of 30 per cent.
Designed to avoid double taxation, the so-called franking credits net households $10 billion each year, with companies benefiting by a similar amount. The final one-third goes to superannuation funds, charities and trusts.
According to a study by the Australia Institute, the wealthiest 10 per cent of households – those earning disposable income of more than $207,000 – gain almost 75 per cent of the $10 billion in franking credits siphoned directly to them.
The distributional analysis, based on modelling by the National Centre for Social and Economic Modelling (NATSEM), also shows the richest 20 per cent of households get $8.3 billion in franking credits while the poorest 20 per cent of households benefit to the tune of just $164 million.
With some 61 per cent of super funds held by the richest 20 per cent of Australians, most of the franking credits directed through the retirement income system also accrues to the wealthy.
“Like so many of the loopholes in our tax system, the way that franking credits are treated delivers a bonanza for many high-income earners and delivers virtually nothing to low-income earners,” said Richard Denniss, the executive director of the Australia Institute.
In a unique feature of Australia’s system, investors without tax liabilities to offset against franking credits are given a cash payout by the Australian Tax Office, costing $4.6 billion in 2012-13.
According to NATSEM, more 1 million Australians get the refund from the ATO, a policy introduced by former Treasurer Peter Costello in 2000.
The lucrative exploitation of the loophole is closely linked to other concessions for superannuants, especially the rule introduced in 2006 that enables people over 60 to earn income on their super tax free.
Because these retirees arrange their affairs to ensure they earn little or no taxable income, they can also convert the franking credits into cash.
According to the Australia Institute, Australia is the only country in the world with a dividend imputation system that offers the cash payments.
In the recent intergenerational report, Treasury said there were “revenue concerns” about the cash refund.
Dr Denniss said eliminating the $4.6 billion tax break was an “easy and fair budget fix”.
“It’s hard to imagine a fairer and less politically painless way for the government to collect some more revenue than to end this inequitable tax break.”
Treasurer Joe Hockey has identified the franking credit, or dividend imputation, regime as ripe for reform, asking for “suggestions” for savings.
Whether he acts on the tax breaks in next month’s budget, however, remains to be seen.
The government is facing a budget deficit of more than $40 billion next financial year, and large shortfalls in future years.
However, any reforms to franking credits would slash the incomes of wealthy retirees, as well as operators of self-managed super funds, both of whom are a potent political force.
As one industry observer told Fairfax Media: “You are talking about people with a lot of money, and a lot of time on their hands.”
