The Needle On Franking Credits!

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Needless to say that retail investors who generally get overlooked, play a significant role when it comes to punting on stocks; and the key aspect is that these investors bank upon income stocks a lot in view of the dividend amounts and franking credits that are received. Looking at this, many market players are viewing that the Labor’s plan to eliminate full tax refunds is set to impact low income earners and modest retirees, who deploy the hard-earned money into equities. These classes are the ones that are expected to suffer the most on any changes that modulate the franking credit system. The top managements of various funds such as Wilson Asset Management are of the view that the Labor’s changes to the dividend imputation would further deteriorate the negative momentum in the equity markets. Dividend imputation came up in 1987 and was brought by Hawke Government so that the concept of double taxation can be eliminated at the shareholder level. Later on, in 2001, the Howard government came forward and further improvised the system and stated that individuals must get a tax refund so that they can be compensated in the process of tax overpayment at the company level. 

The concept of dividend imputation has positively affected the financial system of Australia so far, and some market trackers are of the view that this is the reason that the economy has not seen a recession in the past 2 decades or so. The present system helps in the formation of capital in the Australian region, stabilizing the economy with reduced cyclicality, managing efficient capital distribution as well as nurturing a progressive taxation system. It is viewed that any adjustment, or even removal, with regards to the dividend imputation might significantly impact the entire Australian financial system, and particularly, equity space wherein retail investors have started playing a significant role.

On a global basis, Australia is regarded as the only country wherein a refund is provided for the corporate tax which has been paid to the shareholders if they are not paying the income tax. Thus, with this backdrop, claims that the Labor’s policy would be negatively impacting the retired population as well as low-income earners in view of the changes suggested have been on the rise.

There have been claims that the dividend imputation refundability is an economic case as it is highly beneficial for the Australian share market. However, it has time and again being argued that the Australians need to take up economic decisions on the back of economic fundamentals and not because of some favorable treatment of the taxes. The present system has been motivating and prompting people to be overweight on the Australian shares; and is now said to be under discussion with Labor portraying a contrasting view.

While any possible return to dividend imputation is an area that is debatable, many experts claim the refunds typically to be overpayment of corporate taxes and thus coming under the purview of a controversy.

On one hand, strong opinions are being portrayed that Opposition is standing high headed on scraping franking credits post winning the next federal election; and on the other hand, we see fund manager Geoff Wilson pushing ahead the petition signed by many in support of franking credits.

This now tethers on future events that investors need to be watchful of.


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