Australian Franking Credit and Negative Gearing

Running head: AUSTRALIAN FRANKING CREDIT AND NEGATIVE GEARING
AUSTRALIAN FRANKING CREDIT AND NEGATIVE GEARING
Name of the Student
Name of the University
Author Note

AUSTRALIAN FRANKING CREDIT AND NEGATIVE GEARING
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Introduction-
There is a substantial difference between the coalition and labor- the two major
parties in terms of the collection of tax and the concerned parties of tax collection. Although,
it is already known that labor is the one who pays higher tax among the two but by how much
it is still not disclosed. The labor wants to have exposure to negative gearing, franking
credits, capital gains tax, and superannuation which would form a new tax reform if
combined together (Iskhakov,& Keane, 2018). It has been accused by the coalition that $387
billion is expected to be imposed by the labor in the new taxation but there arises a debate
regarding the estimate. Alternatively, the coalition has proposed a simpler and flatter taxation
system rather than incorporating these changes. This will make the tax system less
progressive inclining towards the high income earners as a result of which the labors have
rejected the revised package of Coalition’s reforms (Murtin & Robin, 2018).
Answer no. a-
The term franking credit refers to tax credit which is paid to the shareholders by the
corporations along with the payments of the dividends. It is also referred as imputation credit.
For eliminating or reducing double taxation many countries along with Australia uses this tax
credit system. The system of franking credit allows the shareholders the allocation of tax
credit by the companies since the tax has already been paid with the dividends (). Based on
the taxation situation, a shareholder is entitled to have income tax reduction or refund of tax.
In Australia, the franking credit system helps large organizations for promoting the equity of
long-term ownership. It has also helped in increasing the payout of dividends for the
investors. The tax bracket is from 0% to 30% for the investors for the payment of franking
credit. It decreases with the increase in the tax rate maintaining a proportional relationship.

AUSTRALIAN FRANKING CREDIT AND NEGATIVE GEARING
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There is a holding period for receiving franking credit, in Australia it is of 45 days (Wood &
Coates, 2018).
In property investing negative gearing is commonly used. For purchasing an asset
which produces income, negative gearing works as a financial leverage. It is mainly used for
purchasing rental property when the asset does not produce income greater than the price of
the asset (Deutsch, 2018). For instances, the costs like cost of maintenance depreciation or
interest of loan payments are not sufficient for the rental income for bearing those costs.
There is one advantage for using negative gearing which is, it is beneficial for the owner in
billing of taxes. There are few countries which allow negative gearing and Australia is one of
those countries along with New Zealand, Germany, France, United States. When the property
is finally sold then only negative gearing is profitable. It should be kept in mind that the value
of the property must be rising and not falling or stagnant. If the property is sold at the time
when the price is stagnant then it will be sold at a much higher price which would help to
manage the losses as the asset was not making enough income to satisfy the expenses
(Eccleston, Verdouw & Flanagan, 2018).
As per the ANU studies (Theaustralian.com.au., 2019) if Bill Shorten succeeds the
election of 18th May then there will be a negligible impact of the newly suggested restoration
of franking credits and alternation of negative gearing along with capital gains and trusts on
the Australian households of near about 50% as they are measured in terms of income and
wealth. At the same time, there is a negative impact played by the Morrison Government
specifically on franking credits for the self-funded retirees whose income is modest but it has
been criticized by Australian National University’s Centre for Social Research and Methods
as a gibberish idea. According to the analysis 20% of the income and wealth distribution of
households has been benefitted by the franking credits which is comparatively larger than
other households. The economic and social researcher Ben Philips, has redesigned the labor’s