Perhaps a few examples of a cash refund may help to explain Labours proposed policy.
A fully franked dividend means that the Company paying the dividend has paid Company tax of 30%. Or depending on turnover and the new small business company tax rates it may be slightly lower, but lets stick with the 30% for this example.
Franking credits are applied against the tax bill of the person/entity receiving the dividend - if the franking credits are more than the tax bill - the excess is refunded to the taxpayer - labour wish to stop the excess being refunded.
Example 1: Mary receives fully franked dividends of $35,000 (this is paid into her nominated bank account) and because it is fully franked she also receives $15,000 in franking credits. When Mary comes to do her tax, the dividends and franking credits are added together to 'gross them up' to become $50,000. Assuming Mary has no other income from a job, interest, no deductions - this will mean her taxable income will be $50,000 and at Marginal Rates that will mean her tax bill will be roughly$9K. Currently she gets to apply her $15K franking credit against her tax bill - and because it is $6K more than her tax bill - she receives the $6K as a tax refund. Under Labours proposal she will not receive the $6K refund - the government will keep it.
Example 2 : Mary's SMSF Superfund receives fully franked dividends of $35,000 (this is paid into SMSF nominated bank account) and because it is fully franked it comes with $15,000 in franking credits. If the fund is in Pension Mode (0% Tax) when the SMSF's tax is done, the dividends and franking credits are added together to 'gross them up' to become $50,000. Assuming the SMSF has no other income from interest, no deductions, no CGT - this will mean the SMSFs taxable income will be $50,000 and in Pension mode will mean a tax bill of $0. Currently the SMSF gets to apply the $15K franking credit against its tax bill - and because it is $15K more than the SMSFs tax bill - the SMSF receives the $15K as a tax refund. Under Labours proposal the SMSF will not receive the $15K refund - the government will keep it. If the SMSF were in Accumulation mode where 15% tax is applied to income, the tax bill would be $7,500, in accumulation mode the fund is also likely to be receiving contributions, so with Contributions tax the tax bill is likely to be higher - so SMSF's in accumulation mode will be less impacted than SMSF's in Pension Mode.
Example 3 : Mary receives fully franked dividends of $35,000 (this is paid into her nominated bank account) and because it is fully franked she also receives $15,000 in franking credits. When Mary comes to do her tax, the dividends and franking credits are added together to 'gross them up' to become $50,000. This time lets assume Mary has other income of $40,000 gross per year ($5,400 withheld as tax before she is paid) from a job with no other income from interest, or no deductions - this will mean her taxable income will be $90,000 ($40,000 from her job plus the grossed up dividends) and at Marginal Rates that will mean her tax bill will be roughly$22,600. Currently she gets to apply her $15K franking credit against her tax bill, and her employer has withheld $5,400 from her job income and sent to the ato - this totals $20,400 and is $2,200 short of her tax bill. This will mean she has to pay $2,200 to meet her tax bill meaning she has fully utilised her franking credits thus there will be no refund due. So in this scenario the Labour proposal will not impact her at all.
So who does it impact:
1. Those receiving fully franked dividends of less than $98K who have less than $37K from other income sources.
2. SMSF's in pension mode, to a lesser extent SMSF's in accumulation mode.