Wide impact with any dividend imputation change; “low income” retirees likely to be hurt the most

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MEDIA RELEASE

The impact of any change in the way dividend franking credits are treated is more likely to be felt by “low income” retirees than anyone else, warns Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.

 “Regardless of the rights or wrongs of the way dividend imputation now works, if the proposed change was introduced, many retirees will suffer a significant drop in their personal cash flow.”  (See case study below as an example.)

Mr Philpot said that with a pension fund that has around 40 percent exposure to Australian shares (a common ‘balanced’ fund allocation), the impact on earnings within the account would be a reduction of about 0.5 percent per annum.

 “With expected future earnings for pension accounts of about six to eight percent, any change in dividend imputation will translate into a drop of nearly 10 percent of future earnings, over a lifetime.  This will eat away at pension balances at a faster rate.

 “This is more significant for retirees with lower pension account balances than those with the larger balances, as they are more likely to be withdrawing above the minimum pension requirements. Their pensions will now erode even more quickly.

 “However any pension balance that is less than $1.6 million will be impacted by this change.”

 Mr Philpot said that retirees who also have Australian share investments in their own name will be ‘double hit’.

 “Those pensioners who are mostly reliant upon the age pension, but also have a proportion of their wealth in Australian shares, will feel the impact of any loss of the tax refund more than most.

 “As it is, the tax return they now receive each year typically helps with an annual holiday or some other major expense.”

 He added that if such a change is made, it would also impact on retirees’ investment decisions.

 “Those stocks that have high income yields but not a lot of growth will not be attractive if they no longer generate franking credits in the hands of investors,” Mr Philpot said.

 

 Case Study

Dave is a 70 year old single retiree who owns his own home. His income earning assets consist of:

  • Super Pension – Balance of $200,000. Dave draws the minimum pension of $12,000 a year (tax free)
  • Personal – He has an Australian share portfolio (mostly banks) totaling $100,000. It earns him a dividend income of six percent a year that is fully franked ($6,000 dividends plus $2,571 franking credits)
  • Other – He has other assets and cash totaling $20,000
  • Total assets (excluding home) are therefore $320,000

 Dave also has an age pension of $690 per fortnight ($17,940 a year).

 Dave’s total annual taxable income is:

                                                    $

Age pension                        17,940

Dividends                               6,000

Franking Credits                   2,571

Total Taxable Income      26,511


While the tax on the above is $1,579, with the Seniors & Pensioners Tax Offset, there is no tax payable and there is no Medicare levy. However, there is a tax refund of 100% of the franking credits.  Therefore Dave’s total annual cashflow is:

 

                                                 $

Age pension                        17,940

Super pension                     12,000

Dividends                               6,000

Tax refund                             2,571

Dave’s total cashflow     38,511

 

Therefore the impact of any change will be the loss of the tax refund of $2,571, which is 6.67 percent of his annual cashflow.

 

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HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.