Assignment | FRANKING CREDITS AND NEGATIVE GEARING.

Running head: FRANKING CREDITS AND NEGATIVE GEARING
Franking Credits and Negative Gearing
Name of the Student
Name of the University
Author Note

FRANKING CREDITS AND NEGATIVE GEARING1
Introduction
Franking credits is a popular concept in Australia in which the company pays the tax
credit along with the dividends to the shareholders. The main purpose of these credits is to
ensure that there is no double taxation charged on the dividends paid by the entity. It means that
the tax paid on the dividends by the company is allowed as a deduction in the hands of the
taxpayers1. For this to happen, the companies usually tend to attach a franking credit to the
dividend paid to a customer by stating the rate at which the entity has paid taxes on the
dividends. Over the years, this concept has been found to benefit many of the people as it
provides them with additional income in the form of cash refunds while reducing their tax
burden2. Negative gearing is related to an investment property on which the net rent earned
during a year is less than the expenses incurred on it. Hence, the total income earned from the
property for an income year turns out to be negative. In Australia, these negative returns earned
from a property can be allowed as a set off against the income earned by the taxpayer during the
year. Hence, it reduced the overall tax liability of the taxpayer during the year. Depreciation is
also allowed as a deduction apart from the expenses incurred by the taxpayer in relation to the
property.
Reforms suggested by the Australian Labour Party
During the election campaign of 2019, the Labour Party brought up a new tax proposal in
which the negative gearing was scrapped on certain properties. The proposal suggested that
negative gearing would only be allowed on properties constructed before 1 January 2020 and not
1 Howitt, Kate. 2019. "11 Urban Myths about Franking Credits". Livewire Markets. Accessed October 3 2019.
https://www.livewiremarkets.com/wires/11-urban-myths-about-franking-credits.
2 Swan, Peter L. "Investment, the Corporate Tax Rate, and the Pricing of Franking Credits." (2018).

FRANKING CREDITS AND NEGATIVE GEARING2
allowed on any newly constructed properties after the date. This change in policy increased the
tax liability of individuals who had previously been allowed to charge the losses from rental
property against the income earned by them during the year. The dividends paid by the
Australian companies were previously not applicable under the imputation system of the country.
However, since 2001, this system changed and cash refunds became available to the taxpayers3.
Under the imputation system, if the tax rate of an individual was less than the tax rate of the
company and if the individual had no other tax liability, then the difference amount in the
franking credits and the tax liability of the individual was to be allowed as a cash payment to the
shareholders. The franking credits policy has been considered to be one of the best policies with
respect to people that do not have any other tax liability due to the increase in income provided
to4. The Labour Party suggested that the refunds system was to be scrapped and restored to the
system existing prior to 2001. Under which, no cash refunds should be allowed to the
shareholders in a particular year. However, in further proposed changes, the party suggested that
people who were receiving pension payments could claim refunds on the franked credits. The
most significant impact of this policy was on the self-managed superannuation funds who had
invested most of their amounts in the Australian shares and had customers reaching the age of
pension but did not start receiving the same yet. The franking credits policy was rejected by the
public as it was understood to be benefiting only the rich investors and the people who were
receiving the funds from their retirement plan. Due to the nature of this policy, people who were
on the verge of retirement rejected it and did not vote for the labour party. The response from the
3 Chowdhary, Hina. 2019. "Franking Credits- An All-Inclusive Overview - Kalkine Media". Kalkine Media.
Accessed October 3 2019. https://kalkinemedia.com/2019/09/03/franking-credits-an-all-inclusive-overview/.
4 Ainsworth, Andrew B., Graham Partington, and Geoff Warren. 2015. "Do franking credits matter? Exploring the
financial implications of dividend imputation." Exploring the Financial Implications of Dividend Imputation (June
1, 2015). CIFR Paper 058 (2015).