How would the proposed changes to imputations credits affect FIRE?

There are a number of reasons to recommend using an income stream from dividends on shares to fund your retirement in Australia, one of which is that you can use attached franking credits attached to get a cash refund. My understanding of the Australian tax system is that tax is meant to be paid by the eventual recipient of income, in this case the shareholder.  Given that tax has already been paid by the company before it pays a dividend to you, to be treated equally with other forms of income such as rent or bank interest which doesn’t have tax taken out before it gets to you, the tax which has been paid by the company should be refunded back to the shareholder as cash. 


This has been the case since the early 2000’s, but it has been proposed by one of the major political parties that this system should cease and instead the tax already paid could only be used to offset any tax due, but not to generate a cash refund.  Although it’s all hypothetical given this is a proposal by the opposition which has been through a bunch of revisals already I thought it would be very interesting to see what the impact would be on an individual or a couple who had retired and were relying solely on dividend and cash refunds for their income.  Warning, this is a long post and there will be math!


As is always the case, none of what I write is either tax or financial advice and you should see licensed professionals about your specific situation.  Also, although I think I’ve got the situations broadly right there are likely going to be some mistakes made.  In particular in this case I’m not sure whether tax payable uses available franking credits first or the low income tax offset (LITO) first.  It doesn’t make a huge difference in any of the examples I have used, and I’ve assumed that franking credits get used to pay tax first before LITO kicks in but it’s worth bearing in mind, although if your margin of error is low enough that it makes a difference to your plans then you may have issues anyway.


The assumptions I have used for this are pretty basic, I’m using a 4% dividend yield and assuming it is fully franked so grossed up yield is 5.7% (it’s actually slightly more than this but I’m keeping the numbers as simple as possible) and for couples the income is split equally between both parties.  All of the income tax calculations I have used are from plugging the grossed up figures into the Moneysmart calculator, however unfortunately it doesn’t calculate the LITO for you.  I think I’ve got the calculations for LITO right in my spreadsheet but could well be entirely wrong.  I’ve also written previously about the issues with using the 4% rule here, but it’s a decent example for this situation.  With all those disclaimers out of the way, here we go!


I’ve run the calculations across a wide range of incomes for both singles and couples. I’ll start with the couples because that’s my own situation and therefore the one I’m most interested in.  One of the many wonderful things about being married (no my wife is not making me write this!) is that in the Australian system of separate filing of tax you get to use two tax free thresholds of $18,200 so you need a smaller income to generate income assuming your portfolio is held jointly or is setup in a structure like a trust which allows you to split it equally (or however you want) to two parties or more.  


Let’s say I wanted an income of around $40,000 a year in retirement under the current system with cash refunds of franking credits.  Personally I want more than this as I’ve discussed previously but $40,000 for a couple seems to be a popular FIRE income number so we’ll start with that.  Dividing by two I only need $20,000 per person which is just over the $18,200 tax free threshold so I’d only be paying 19% tax on the amount over this, I’m not paying the medicare levy which start closer to $22,000, and so only $342 in tax is payable (as I said above I’ve assumed that the franking credits get taken by the tax office first before the LITO kicks in). 

Under the current tax system I only need a portfolio of $700,000 in Australian shares, I calculated this by dividing $20,000 by the grossed up yield of 5.7% and multiplying by the two people.  So 20000/.057*2 = $700,000.  So income per person of $20,000, tax payable of $342 each, total after tax income of $39,316 for the couple which is pretty damn close to $40,000.  Happy days, we as a couple saved up $700,000 and now we’re done with work forever!


Now let’s look at what happens if the system was changed.  Our $700,000 portfolio generates $40,000 in grossed up dividends, but the makeup of that is $28,000 in dividends paid out and $12,000 in franking credits.  If we don’t get a cash refund for those franking credits and only get to use them to offset any tax already paid of $684 (ie the $342 per person) then the actual amount of income we have is just $28,000.  We’ve just taken an $11,316 hit to our income and from having a somewhat comfortable FIRE we’re now not even necessarily covering our fixed living costs.  That’s an absolutely massive change!


I’ve said previously that I’m aiming for an after tax income of around $80,000 pa between myself and my wife.  Based on the current situation, this requires a portfolio of around $1,650,000 which would generate dividends of $66,000 and franking credits of $28,286 for a pre tax total income of $94,285.72.  There would be some medicare levy payable, we’d get some LITO, but there would still be a decent amount of tax due and actual after tax income would be about $79,250. 

If there are no more cash refunds of franking credits then our income would be solely the dividends as the amount of franking credits exceeds the tax assessable, so we’re down to just the dividends of $66,000 and we’re down a bit over $13,000 a year in income.  That’s a pretty nice overseas holiday taken away from us each and every year which is a big part of what we want out of retirement! 


Looking at the scenarios for singles now, you actually need larger amounts of grossed up income to get the after tax income because you don’t have two tax free thresholds to utilise.  I won’t run through this example in detail, but if you wanted the same $40,000 in income as the couple above, you need a portfolio of $825,000 rather than $700,000 to generate it because of this which is a reasonably big difference.  In any case I’ll actually look at two different scenarios for singles, one for a fairly lean FIRE of around $30,000 pa in income and another for a more comfortable $50,000 or so.


The roughly $30,000 pa scenario under the current system requires a portfolio of $562,500 which would generate dividends of $22,500 and franking credits of $9,643.  This is a fair way through the tax free threshold and you’re also paying full medicare levy at this point, so the actual after tax income is $29,296.  Near enough to $30,000 for the purpose of this example at least.  If the cash refund of franking credits goes, then we’re back to just those dividends of $22,500, so a loss of $6,796 pa.  As with the first example for a couple this may actually put you back below the income necessary to meet your fixed living costs so it’s a complete game changer.


For the $50,000 pa scenario I’ve used a portfolio size of $1,125,000 which generates dividends of $45,000 and franking credits of $19,285.71 for a pre tax income of $64,286.  At this point you’re paying full medicare levy, getting very little LITO and paying over $12,000 in tax so using the current tax system your after tax income is $50,596.71.  If the proposed changes come through then you’re back to just having the dividend income of $45,000 pa, so a loss of $5,596.71.  Similar to the changes for the couple, this is probably a pretty decent overseas holiday that you’re missing out on.


A few observations on all of this.

  • These changes affect couples more than single people because as a couple you were previously both able to use the tax free threshold and so needed lower amounts of dividends and franking credits to get your required income, but if you don’t get those franking credits refunded as cash then you both miss out on that income. 
  • If you’re going for a lower income number it also affects you more because you weren’t paying much tax anyway and so you could use more of the franking credits to get a cash refund rather than offsetting your tax. 
  • The maximum loss seems to be around the $25,000 in dividends level with franking credits of $10,714 at which point you would lose $7,118 if the proposed changes went through.  Your income would drop from $32,118 as a single person to $25,000, and for a couple from $64,236 to $50,000.  This would have required portfolio sizes of $625,000 and $1,250,000 respectively. 
  • At some point the proposed changes don’t make a difference to your situation because you start having to pay tax at a higher marginal rate and your average rate of tax becomes higher than the 30% offset.  My rough calculations are that for a single person this is when you get around $95,000 in dividends, $40,714 in franking credits and need a portfolio of $2,375,000.00 which either way is going to get you around $95,000 in after tax income.  Double these amounts to get the equivalent break even point for a couple.

As I said at the start this is all hypothetical at this point in time, the party proposing this are not in power, they’ve revised the proposal several times, lots of things can happen between now and the next election, even if this party wins power in the lower house there is no guarantee they could get it through the Senate etc etc.  Having said all that given it would obviously make a pretty big difference to FIRE so it’s worth thinking about. I’ve included my calculations for both singles and couples below so if you’ve made it this far and like numbers, have a look!




What effect would these proposed changes have on you, and how would you cope with it if in the event that it happened when you had already retired?  If you liked this post and would like to read more like it please subscribe using the link on the right!

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16 Responses to How would the proposed changes to imputations credits affect FIRE?

  1. Benji says:

    Really interesting article. I have wondered this quite a lot since old Bill made the announcement. The reason why I think a policy like this will get through Parliament eventually is the fact that it a growing issue to the budget bottom line. When Howard/Costella brought in the changes that allowed franking credits to be refunded, the refund cost the budget bugger all. Now over many years of compounding it is in the billions and rising per year. Its not sustainable to be giving a refund to people who are essentially not paying any tax.

    I think this article highlights to me that if you want to pursue a FIRE lifestyle, you are best to do so in a manner that means your investment portfolio is well diversified into other asset classes i.e. property, REITs, bonds, interest etc. You can never be sure what will change in the future, but if you are well diversified then it helps!

    • Aussie HIFIRE says:

      Hi Benji, thanks for reading! I’ve got no doubt that a policy like this will eventually get through Parliament, and the LNPs defence of the current system was so half hearted that I suspect they’d probably end up adopting a policy like this at some point anyway if Labor don’t get it through whenever they are next in power. I can see the rationale for the cash refund in that it treats income from all sources equally, but it’s obviously slightly more complex for people to understand than simple income from bank interest or term deposits and so a political party can exploit that to grab more money.

      I agree that it makes sense to have diversification for a variety of reasons, but at the end of the day governments will do what governments have always done ie try and take as much of your money as possible. Still, having a variety of sources of income will likely help you have a more robust system so you don’t get affected by something like these proposed changes.

    • mjr says:

      You’re not taking into account the fact that balances over $1.6m are now taxed at 15%. Gone are the days of billions of untaxed income in super.

      This is a purely political exercise designed to kill the SMSF and move them into industry funds and it should be fought tooth and nail.

    • Simon says:

      Drives me nuts when people say in that example that they pay no tax. THEY HAVE!!! It’s a line Bill Shorten pushes to justify the theft of money, and people need to think and challenge it.

      They are part owners of a company, and as such are entitled to a share of the profits. Their share was taxed at 30% before they received it, so they have already paid 30% tax on that amount of money. If all their income combined, less all their taxes paid means they paid too much tax, they are ENTITLED to a refund for the overpayment.

  2. Monkey Drugs says:

    Also just came across the idea of Listed Investment Trusts that pay a higher distribution with no tax and without (or with minimal) franking credits – there’s talk (and I understand that it’s all conjecture until Labor ever get their legislation through) that some LICs may change to LITs

    https://www.livewiremarkets.com/wires/avoiding-the-great-labor-franking-credit-grab

    Anyways, it’ll be interesting to see, what, if anything happens.

    • Aussie HIFIRE says:

      Thanks for the link. My read of that article is that it would just make the LICs into LITs which are pass through entities, so if most of the payments they receive are still fully franked dividends which they most likely would be then it doesn’t really solve the problem much. It would also stop LICs from smoothing out your dividend over time, this may be a good or a bad thing depending on your preferences.

  3. Anon says:

    Hello,
    Thanks for doing the math. For a single with 40k franked all shares income, would adding an investment property income/tax at 12k help offset the loss?.
    Thank you

    • Aussie HIFIRE says:

      Hi Anon, I’m not sure if you mean 40k income in dividends plus franking credits on top, or 40k in total dividends including franking credits. It doesn’t actually matter either way though, if you add on 12k of income from a property then under the proposed scheme you would have all the tax that would otherwise be payable on that 12k offset completely by the excess franking credits you would otherwise lose, so you get to keep the whole 12k of income. I hope that helps?

  4. Anon says:

    Hi Aussiehifire,
    Thanks for the reply. That’d be total including franking credits. I guess people will shift money into things that sweep up the credits.
    Cheers.

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  6. sageybadegey says:

    I guess, the question now is, if all these labor changes are in place, what changes are we going to do with our asset allocation? Do we switch back into a global ETF portfolio e.g. VAS, VEU & VTS/IVV? Or do we stay the course of 100% Aussie LICS/ETF?

    Can you share you’re plan of attack aussiefire?

    • Aussie HIFIRE says:

      Hi there! That’s a good question, and at the moment I’m not sure to be honest. The cash refunds on the imputation credits would certainly come in handy and form at least part of my overall strategy so losing them would hurt a lot. On the other hand it would be nice to be more diversified, and having some international assets would help with that. Ordinary Dollar has done some great work on that here https://ordinarydollar.com/safe-withdrawal-rates-for-aussies-part-4-portfolio-optimisation/ which shows that there is a lot to be gained from having some US exposure, although it would be nice to see what it looks like after FX rate changes are taken into account. So at the moment it’s very much in flux. The good news is that I still likely have a while to go so if/when I decide to change strategies I can just do it. Being flexible with your plans is crucial.

  7. Jimmy says:

    Good write up. I wonder what the blogs a year from now will be about. Will Labour win? Will they get it all through? Or will it be business as usual? If it does go through it may be best to be in RE? The devil is always in the detail I guess. I heard someone say the politicians are all buying real estate? Apparently there is some register which shows what they own.

    • Aussie HIFIRE says:

      I think at the end of the day it’s always wise to assume that the politicians will keep on coming for more of your money. I see superannuation as being more of a prize for them given the huge amounts sitting there taxed at concessional rates or not at all, but they’re certainly keen on getting their hands on the money in your own name as well. It’s all hypothetical at the moment and I’d expect that there would be more changes to the proposal given that it hasn’t been fleshed out much yet, what those changes will be who knows.

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