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Refundable excess imputation credits – The end is nigh

It has been made clear – if Labor wins the next Federal election, it will amend the imputation system to make excess imputation credits non-refundable from 1 July 2019.

At present, imputation credits (representing tax already paid by the company on franked dividends) are used by taxpayers to offset tax payable on the dividends in their hands so that they are not “double taxed”.  If the individual’s tax rate is lower than the corporate rate, then any excess imputation credits can be used to offset tax liabilities on other taxable income.  And where the imputation credits exceed total tax liabilities, the individual is entitled to a cash refund for the amount of the excess.  

It is the latter that the ALP is looking to squash which has the potential of impacting a number of taxpayers.  Only a few exemptions apply – one being a “pensioner guarantee”.  If you are either:

  1. An individual that is a ‘pension or allowance recipient’, or
  2. Have a SMSF with at least one ‘pension or allowance recipient’ (before 28 March 2018)

Then congratulations! You make the cut and can still claim your refundable excess imputation credits!

If you are not covered by the “pensioner guarantee”, and you have a tax rate below the company tax rate you may be affected by this change.  Labor says the change would have most impact on a small number of individuals and SMSF members earning high income. The Parliamentary Budget Office has estimated that 840,000 individual Australian taxpayers would be affected by Labor’s proposal and 210,000 SMSFs.

If you are an individual taxpayer, just over the assets and/or income test thresholds and wish to qualify for a pension, what can you do?

  1. Gift within the allowable limits 
  2. Increase discretionary spending
  3. Do not implement strategies that may increase assessable assets

If you are a self funded retiree with low levels of taxable income likely to be impacted by the ALP proposal, what can you do?

  1. Amend your personal investment strategy to reduce your allocation to Australian shares and increase your allocation to other asset classes that don’t pay franked dividends, such as global shares, fixed interest and property.

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