To recap, imputation credits are a tax credit attached to dividends paid by Australian companies.  The dividend imputation system provides shareholders a credit for the tax paid by the company on its profits. This ensures those profits are only taxed once in the hands of the shareholders, rather than both at the company level and the shareholder level.

Under the current system, which has been in place for the past 18 years, those whose tax rate is less than the company tax rate can receive their excess dividend imputation credits as a tax refund.

For example, a self managed superannuation fund (SMSF) whose members are all over 65 and are receiving account based pensions from the fund would not have any taxable income.  Such a fund would receive all its dividend imputation credits as a refund. 

Under the proposed changes from the Federal Opposition, such funds would lose access to that annual refund.

For a self managed super fund with $1 million in assets, and 40% of that amount in dividend paying Australian shares, the SMSF would be receiving dividends of around $16,000, attached to which would be about $6,850 of franking credits.  If this fund lost access to the refund of these credits, its annual income would be lowered by $6,850 each year.  Put another way, the income return would fall by 0.68% per annum.

Clearly this is a disadvantage to those who have been utilising the current system to assist in meeting their income needs. 

The large industry super funds are at somewhat of an advantage, as they have a large number of contributing members and can utilise the excess imputation credits from their pension members to reduce the impact of contributions tax…effectively enhancing returns.

So what can SMSF members and those reliant on their dividend income do?

Aside from speaking to your local members of federal parliament we do not recommend making any major changes to your investment strategy just now. 

Over the next 12 months it may be prudent to speak to your financial adviser to understand the impact on your position should these changes be implemented. But bear in mind there is plenty of time to go until the next election and political policies can change at short notice.