Business

How Abbott's parental leave scheme will affect retirees

APART from the disgraceful personal attacks by both sides and on the PM by Australia's most powerful man, Rupert Murdoch, the standout in the lead up to the election for me has been Tony Abbot's promised paid parental leave scheme.

It inspired a query from one of my clients as to whether claims that it will impact on self-funded retirees are true.

At the risk of sounding like a politician, I am going to take a circuitous route in explaining my answer. But the straight answer is  definitely yes.

To discover why, I should first waltz you through how listed companies pay dividends to shareholders.

Because Mr Abbot says that something like half the cost of the paid parental scheme will be met by companies that post taxable profits greater than $5 million. Most will be listed on the stock exchange.

Let's say Company Z has a taxable profit of $100 million. Tax payable would be $30 million, leaving distributable cash of $70 million.

The CEO and his management team will predict what cash will be needed by the company to run its business, make adequate provisions for expected future expenses and so advise the board.

At that level, the decision is made as to how much of the $70 million in cash reserves will be distributed to shareholders as dividends and a credit for the 30% tax paid by the company will be given along with the cash distributed to each shareholder.

This tax credit is called a franking credit and the dividends are called franked dividends.

Under the Abbott model, Company Z will pay a levy of $1.5 million towards the paid parental leave scheme.

A levy is not a tax, so there would be no franking credit attached. I assume the first levy falls due only once the taxable profit is reported, then a similar amount is paid provisionally monthly going forward.

That would mean that the company would need to set aside from its cash reserves double the levy plus a bit in case profits rise before striking the dividend.

The result: a reduced dividend to shareholders and the double taxation of the levy because of the lack of franking credit.

It's bad enough that this will affect investors with substantial holdings in profitable companies, but its effect on superannuation funds will be quite marked.

Super funds use the difference between their 15% tax rate and the 30% franking credits they receive on share investments to bolster performance outright and to stabilise it by investing in tax-exposed cash and fixed interest.

The unfair double taxation of dividends was the reason Paul Keating brought in franking credits in the first place in 1987.

Bob Lamont is director of Corporate Accountants at the Night Owl centre, Gladstone. Contact him on 1300 450 810 or email boblamont1947@gmail.com.

Topics:  federal election 2013, retirees, superannuation, tony abbott




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