Labor's changes would hurt retirees: ASA

Labor leader Bill Shorten has promised to close a $5 billion tax refund loophole

The policy will apply from July next year if Labor is elected.

If this dividend was the person's only income, they would be below the tax-free threshold and not have an income tax bill.

Earlier on Tuesday, Finance Minister Mathias Cormann labelled Shorten "shifty" for claiming the proposal was not a tax increase.

Labor insisted its rejection of the rebate would save $59 billion to reduce the Budget deficit and fund essential programs over the same time the Government wants to implement $65 billion in tax cuts for big business.

"Anyone with a pension account and balance of less than $1.6 million, with any exposure to Australian shares, will certainly be worse off with this change", he said.

But there was a shift in 2000, when the Howard-Costello Coalition government amended the policy, making it more generous for SMSFs and self-funded retirees - a policy which still exists today.

"At face value, it appears that this proposal would impact Mum and Dad investors both through their superannuation and through the shares they own outside of super and compromise the long-standing investment neutrality principle", Dr Fahy said.

The Government says seniors claiming a pension and self-funded retirees are likely to be impacted but Labor claims it would only affect 8 per cent of the population.

Federal Treasurer Scott Morrison called it the Opposition's bid to "steal" tax refunds from the Australian public.

Labor this week announced a proposal to remove cash refunds for excess dividend imputation credits, as a way of "improving the budget bottom line".

To ensure that profit isn't taxed twice - once with corporate tax and again on income tax - shareholders get a $30 tax imputation to go with their $70 dividend.

Research commissioned by the Australia Institute has found that 75 per cent of the dividend tax credits have gone to households in the top 10 per cent of incomes.

Labor's proposal to abolish cash refunds for shareholders with excess franking credits has caused heated debate among the political and business communities.

"The remaining $10 billion go to other Australian companies".

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The Self-managed Independent Superannuation Funds Association (SISFA) said the policy "fails the test of fairness" as it will benefit taxpayers on higher incomes at the expense of those on lower incomes. It found the top 1 per cent of self-managed superannuation funds get an average annual refund of $83,000.

"If the Labor Party are prepared to deny you what is effectively a tax refund, because you've overpaid your tax, where will they stop", he said.

"Now, if you were earning $18,200 you would have a zero tax rate".

"Believe me, they won't like their investment strategy being tipped on its head to these law changes", said Michael Croker, head of tax at Chartered Accountants Australia & New Zealand.

"And that's not right".

However, since the company has already paid $600 in tax, he/she will be entitled to a refund from the ATO.

Without franking credits, companies would be taxed their profits, and individual shareholders would then be taxed on those same profits as well. This is called dividend imputation. This meant that if an imputation credit was greater than the tax liability, investors would receive a cheque at tax time.

"Labor's latest tax hike is a $59 billion slug on more than 1 million pensioners, retirees and low income earners who will get taxed twice by Labor on what they earn from investing their hard earned savings".

Self-managed super funds are major beneficiaries of the scheme, with some investors paying zero tax but still getting cash refunds of as much as $2.5 million a year.

In 2000/01, the federal budget was billions of dollars in surplus and the economic outlook was strong.

Shareholders will still get the tax imputation to reduce their tax liability.

If Labor wins the next election and introduces its tax plan, these refunds will cease.

Shadow treasurer Chris Bowen says the changes have the approval of the original system's architect, Mr Keating.

But Mr Morrison said low-income earners and pensioners would be taxed twice under the Labor plan because the government would no longer give them the cash. "Our back of an envelope figures show it will cut $5,000 of income from retirees earning about $50,000 a year", Mr Maroney said.

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