Refundable franking credits wouldn’t be part of tax system designed today

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The Institute of Public Accountants (IPA) says that if the tax system was designed from scratch it likely wouldn’t have refunding of franking credits, but doesn’t support stopping refunding the credits without broader tax reform.

IPA CEO Andrew Conway says: “If we were designing a new tax system today, you would most likely not have full imputation where the taxation is assessed in the hands of the recipient and any excess franking credits are refunded.”

“In today’s economic circumstances it would be difficult to justify from a fiscal sustainability perspective,” he said.

However the IPA doesn’t support Labor’s policy of stopping refunds of franking credits, unless it is linked to “holistic” changes to the tax treatment of savings.

“The case for removing dividend imputation is not strong and any tinkering needs to be assessed against some alternative benchmark tax system such as removing dividend imputation entirely and replacing it with a discounted tax rate,” said Mr Conway.

The IPA has welcomed the establishment of a Parliamentary inquiry into the implication of removing refundable franking credits – which held two public hearings last week, with a third scheduled for this week. Mr Conway said the inquiry will “heighten community understanding of a well-established feature of our taxation system”.

“The Labor Party is proposing to change the rules to remove the ability for individuals and superannuation funds to claim their full entitlement to franking credits,” he said.

“The inquiry will highlight the significant implications attached to any change in government policy on refunding imputation credits.”

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