Analysis of Franking Credits and Negative Gearing in Australia
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Essay
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This assignment delves into the Australian tax concepts of franking credits and negative gearing, examining their mechanisms and impacts. It analyzes the Australian Labour Party's proposed tax reforms, specifically the changes to negative gearing and the franking credits system, and their potential consequences on taxpayers, particularly those with investment properties and self-managed superannuation funds. The assignment explores the principles of a good tax system, evaluating the proposed policies based on efficiency, equity, simplicity, neutrality, and certainty. It further presents an opinion on the regressive nature of these policies, arguing that they unfairly impact working-class and lower-income groups while potentially destabilizing the economy. The conclusion summarizes the implications of these policies and their rejection by the voters. The assignment uses various sources to support its arguments.
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Running head: FRANKING CREDITS AND NEGATIVE GEARING
Franking Credits and Negative Gearing
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Franking Credits and Negative Gearing
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Author Note
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1FRANKING CREDITS AND NEGATIVE GEARING
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).
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).
2FRANKING CREDITS AND NEGATIVE GEARING
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).
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).
3FRANKING CREDITS AND NEGATIVE GEARING
wealthy people was also not very positive as it did not truly affect them in a visible manner. And
the complexity of the policy resulted in most of the people failing to understand the policy for
what it was. Due to the fact that the voters realised that the change in the policy would not be
beneficial to them, this policy was rejected by the voters in the country. With regards to the
negative gearing, the labour policy suggested that it was not charging a new tax on the
individuals but was taking away a subsidy that was previously available to the people making
losses on their properties. However, it was clear to everyone that this new policy increased the
tax liability of individuals who incurred losses from their rental properties purchased on or after
1 January 2020. This is because the amount which was previously allowed to be written off as a
deduction was not anymore allowed to be reduced. This automatically increased the tax liability
of the individuals in a particular income year with no appropriate options available to set off the
losses incurred by them. It was expected that this particular policy would lead to a housing
market crash within the country in a given financial year5. Hence, as this policy was impacting a
majority of the lower and middle income groups of the country, it was rejected and the Labour
Party ultimately did not manage to win the election.
Negative Gearing – A good tax principle?
The negative gearing, although not widely popular, followed some of the principles of a
good tax. As the labour government intended to fund a new health policy for the working class
people of the country, it was decided that the income earned from the tax policy would be used
in the funding of the health policy for the people. Hence, the principles that were followed by the
5 Coates, Brendan, and Danielle Wood. 2019."If Franking Credits And Negative Gearing Didn’T Exist, No One
Would Invent Them". Inside Story. Accessed October 3 2019. https://insidestory.org.au/if-franking-credits-and-
negative-gearing-didnt-exist-no-one-would-invent-them/.
wealthy people was also not very positive as it did not truly affect them in a visible manner. And
the complexity of the policy resulted in most of the people failing to understand the policy for
what it was. Due to the fact that the voters realised that the change in the policy would not be
beneficial to them, this policy was rejected by the voters in the country. With regards to the
negative gearing, the labour policy suggested that it was not charging a new tax on the
individuals but was taking away a subsidy that was previously available to the people making
losses on their properties. However, it was clear to everyone that this new policy increased the
tax liability of individuals who incurred losses from their rental properties purchased on or after
1 January 2020. This is because the amount which was previously allowed to be written off as a
deduction was not anymore allowed to be reduced. This automatically increased the tax liability
of the individuals in a particular income year with no appropriate options available to set off the
losses incurred by them. It was expected that this particular policy would lead to a housing
market crash within the country in a given financial year5. Hence, as this policy was impacting a
majority of the lower and middle income groups of the country, it was rejected and the Labour
Party ultimately did not manage to win the election.
Negative Gearing – A good tax principle?
The negative gearing, although not widely popular, followed some of the principles of a
good tax. As the labour government intended to fund a new health policy for the working class
people of the country, it was decided that the income earned from the tax policy would be used
in the funding of the health policy for the people. Hence, the principles that were followed by the
5 Coates, Brendan, and Danielle Wood. 2019."If Franking Credits And Negative Gearing Didn’T Exist, No One
Would Invent Them". Inside Story. Accessed October 3 2019. https://insidestory.org.au/if-franking-credits-and-
negative-gearing-didnt-exist-no-one-would-invent-them/.
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Need help grading? Try our AI Grader for instant feedback on your assignments.
4FRANKING CREDITS AND NEGATIVE GEARING
policy makers were efficiency and equity. However, this policy lacked in relation to other
aspects which generally constitute a good tax principle. They are simplicity, neutrality and
certainty6. As the tax contained a provision that the deduction would be allowed on properties
constructed on or after 1 January 2020, it created some confusion about the properties
constructed before that date. It also violated the principle of neutrality as the policy was found to
be extremely unfavourable to people who constructed new properties and highly beneficial to
people who were still making losses from the old ones.7Although simple in nature, the policy did
not provide sufficient clarity about how it was going to tax the new properties and nothing about
the conditions that were required to be met to claim the deduction on the properties. It was
further supported by the leader of the labour party, Bill Shorten, who suggested that the negative
gearing was a mere removal of the subsidy for the new property buyers and not an additional
burden8. However, it is quite clear that the removal of the subsidy and the increase in tax burden
on the individuals went hand in hand and could not be separated. While the intention of these
policies can be suggested to be good, they were ultimately rejected by the taxpayers due to the
additional burden levied on them to fund the expenses of the government.
Opinion
I think that these tax policies were regressive in nature and took Australia to times that
existed in the 20th century. This is because of their unfair nature which is clearly indicated to
6 Cao, Liangyue, Amanda Hosking, Michael Kouparitsas, Damian Mullaly, Xavier Rimmer, Qun Shi, Wallace Stark,
and Sebastian Wende. Understanding the economy-wide efficiency and incidence of major Australian taxes.
Treasury, 2015.
7 "Shorten Grilled On Negative Gearing And Franking Credits On Q&A". SBS News. Accessed October 3 2019.
https://www.sbs.com.au/news/shorten-grilled-on-negative-gearing-and-franking-credits-on-q-a.
8 Laschon, Eliza. 2019. "Shorten Defends Negative Gearing And Franking Credits Changes". ABC News. Accessed
October 3 2019. https://www.abc.net.au/news/2019-05-07/federal-election-2019-bill-shorten-q&a/11085052.
policy makers were efficiency and equity. However, this policy lacked in relation to other
aspects which generally constitute a good tax principle. They are simplicity, neutrality and
certainty6. As the tax contained a provision that the deduction would be allowed on properties
constructed on or after 1 January 2020, it created some confusion about the properties
constructed before that date. It also violated the principle of neutrality as the policy was found to
be extremely unfavourable to people who constructed new properties and highly beneficial to
people who were still making losses from the old ones.7Although simple in nature, the policy did
not provide sufficient clarity about how it was going to tax the new properties and nothing about
the conditions that were required to be met to claim the deduction on the properties. It was
further supported by the leader of the labour party, Bill Shorten, who suggested that the negative
gearing was a mere removal of the subsidy for the new property buyers and not an additional
burden8. However, it is quite clear that the removal of the subsidy and the increase in tax burden
on the individuals went hand in hand and could not be separated. While the intention of these
policies can be suggested to be good, they were ultimately rejected by the taxpayers due to the
additional burden levied on them to fund the expenses of the government.
Opinion
I think that these tax policies were regressive in nature and took Australia to times that
existed in the 20th century. This is because of their unfair nature which is clearly indicated to
6 Cao, Liangyue, Amanda Hosking, Michael Kouparitsas, Damian Mullaly, Xavier Rimmer, Qun Shi, Wallace Stark,
and Sebastian Wende. Understanding the economy-wide efficiency and incidence of major Australian taxes.
Treasury, 2015.
7 "Shorten Grilled On Negative Gearing And Franking Credits On Q&A". SBS News. Accessed October 3 2019.
https://www.sbs.com.au/news/shorten-grilled-on-negative-gearing-and-franking-credits-on-q-a.
8 Laschon, Eliza. 2019. "Shorten Defends Negative Gearing And Franking Credits Changes". ABC News. Accessed
October 3 2019. https://www.abc.net.au/news/2019-05-07/federal-election-2019-bill-shorten-q&a/11085052.
5FRANKING CREDITS AND NEGATIVE GEARING
benefit a selected few who were already covered by the pension policies and willing to invest in
new properties while being able to comfortably sustain the losses incurred on the properties. The
government’s intention to fund the development programs like health policies through tax
revenue is praise worthy, but it fails to charge sufficient taxes from the richer sections of the
Australian society. The people who are likely to be affected by this policy are the working class
people and the lower income groups. It also unfairly increases the tax burden on the people who
invest in new rental properties as they generally tend to make losses while also significantly
reducing the disposable income available with the taxpayers. Although there are arguments
which suggest that abolishing the franking credits and negative gearing mostly impacts the top
20% of the households, it still creates an unhealthy balance in the economy as a whole.9
Conclusion
A complete analysis of the Australian Labour Party’s policies suggests that the franked
dividends and negative gearing were popular policies amongst the working class and lower
income groups of Australia. The franked dividends are a form of credit provided by the paying
companies to avoid double taxation while negative gearing is a set off available on loss making
properties. However, the Labour Party decided to withdraw these policies and use the revenue
generated in funding the health schemes for Australians. However, this did not go well with most
of the people that were affected by the new policies and hence they decided not to vote for the
government at all. It can be suggested that the intentions of the labour party were good as they
wanted to fund the health of the people. However, burdening the same people in the form of
9 Murphy, Katharine, and Sarah Martin. 2019. "Labor's Tax Policies 'Highly Progressive' With Top 20% Feeling
Most Impact". The Guardian. Accessed October 3 2019.
https://www.theguardian.com/australia-news/2019/may/13/labors-tax-policies-to-have-virtually-no-impact-on-
wealth-of-bottom-50-of-households.
benefit a selected few who were already covered by the pension policies and willing to invest in
new properties while being able to comfortably sustain the losses incurred on the properties. The
government’s intention to fund the development programs like health policies through tax
revenue is praise worthy, but it fails to charge sufficient taxes from the richer sections of the
Australian society. The people who are likely to be affected by this policy are the working class
people and the lower income groups. It also unfairly increases the tax burden on the people who
invest in new rental properties as they generally tend to make losses while also significantly
reducing the disposable income available with the taxpayers. Although there are arguments
which suggest that abolishing the franking credits and negative gearing mostly impacts the top
20% of the households, it still creates an unhealthy balance in the economy as a whole.9
Conclusion
A complete analysis of the Australian Labour Party’s policies suggests that the franked
dividends and negative gearing were popular policies amongst the working class and lower
income groups of Australia. The franked dividends are a form of credit provided by the paying
companies to avoid double taxation while negative gearing is a set off available on loss making
properties. However, the Labour Party decided to withdraw these policies and use the revenue
generated in funding the health schemes for Australians. However, this did not go well with most
of the people that were affected by the new policies and hence they decided not to vote for the
government at all. It can be suggested that the intentions of the labour party were good as they
wanted to fund the health of the people. However, burdening the same people in the form of
9 Murphy, Katharine, and Sarah Martin. 2019. "Labor's Tax Policies 'Highly Progressive' With Top 20% Feeling
Most Impact". The Guardian. Accessed October 3 2019.
https://www.theguardian.com/australia-news/2019/may/13/labors-tax-policies-to-have-virtually-no-impact-on-
wealth-of-bottom-50-of-households.
6FRANKING CREDITS AND NEGATIVE GEARING
cutting off their tax subsidies and not allowing them to reduce their losses is unfair and hence the
policy was rejected outright by people.
cutting off their tax subsidies and not allowing them to reduce their losses is unfair and hence the
policy was rejected outright by people.
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7FRANKING CREDITS AND NEGATIVE GEARING
References
"Shorten Grilled On Negative Gearing And Franking Credits On Q&A". SBS News. Accessed
October 3 2019. https://www.sbs.com.au/news/shorten-grilled-on-negative-gearing-and-
franking-credits-on-q-a.
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).
Cao, Liangyue, Amanda Hosking, Michael Kouparitsas, Damian Mullaly, Xavier Rimmer, Qun
Shi, Wallace Stark, and Sebastian Wende. Understanding the economy-wide efficiency and
incidence of major Australian taxes. Treasury, 2015.
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/.
Coates, Brendan, and Danielle Wood. 2019."If Franking Credits And Negative Gearing Didn’T
Exist, No One Would Invent Them". Inside Story. Accessed October 3 2019.
https://insidestory.org.au/if-franking-credits-and-negative-gearing-didnt-exist-no-one-would-
invent-them/.
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.
References
"Shorten Grilled On Negative Gearing And Franking Credits On Q&A". SBS News. Accessed
October 3 2019. https://www.sbs.com.au/news/shorten-grilled-on-negative-gearing-and-
franking-credits-on-q-a.
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).
Cao, Liangyue, Amanda Hosking, Michael Kouparitsas, Damian Mullaly, Xavier Rimmer, Qun
Shi, Wallace Stark, and Sebastian Wende. Understanding the economy-wide efficiency and
incidence of major Australian taxes. Treasury, 2015.
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/.
Coates, Brendan, and Danielle Wood. 2019."If Franking Credits And Negative Gearing Didn’T
Exist, No One Would Invent Them". Inside Story. Accessed October 3 2019.
https://insidestory.org.au/if-franking-credits-and-negative-gearing-didnt-exist-no-one-would-
invent-them/.
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.
8FRANKING CREDITS AND NEGATIVE GEARING
Laschon, Eliza. 2019. "Shorten Defends Negative Gearing And Franking Credits Changes".
ABC News. Accessed October 3 2019. https://www.abc.net.au/news/2019-05-07/federal-election-
2019-bill-shorten-q&a/11085052.
Murphy, Katharine, and Sarah Martin. 2019. "Labor's Tax Policies 'Highly Progressive' With
Top 20% Feeling Most Impact". The Guardian. Accessed October 3 2019.
https://www.theguardian.com/australia-news/2019/may/13/labors-tax-policies-to-have-virtually-
no-impact-on-wealth-of-bottom-50-of-households.
Swan, Peter L. "Investment, the Corporate Tax Rate, and the Pricing of Franking Credits."
(2018).
Laschon, Eliza. 2019. "Shorten Defends Negative Gearing And Franking Credits Changes".
ABC News. Accessed October 3 2019. https://www.abc.net.au/news/2019-05-07/federal-election-
2019-bill-shorten-q&a/11085052.
Murphy, Katharine, and Sarah Martin. 2019. "Labor's Tax Policies 'Highly Progressive' With
Top 20% Feeling Most Impact". The Guardian. Accessed October 3 2019.
https://www.theguardian.com/australia-news/2019/may/13/labors-tax-policies-to-have-virtually-
no-impact-on-wealth-of-bottom-50-of-households.
Swan, Peter L. "Investment, the Corporate Tax Rate, and the Pricing of Franking Credits."
(2018).
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