Finance expert Noel Whittaker puts the comb through the big policy change that will most affect seniors at this year’s federal election, and what you can do to avoid any negative effects.

Thereis nothing particularly new for retirees on the Coalition side of politics as we approach the election. However, Labor is proposing radical changes, with the biggest one affecting retirees being the loss of refund of imputation credits.

But what does that mean? The word “imputation” means to give credit for, and the imputation system was introduced to prevent double taxation of company dividends. Dividends from Australian shares are the only Australian income stream where profits are taxed before you receive them. The franking credits are simply a credit for tax paid by the company on behalf of the investor.

If you invested in property or a property syndicate, or received interest from a bank account, the income from that investment would be paid to you in full and you would pay tax on it at your normal marginal rate. Think about two investors – someone with shares receives a franked dividend of $700 plus a franking credit of $300 for tax deducted by the company. The other receives a $1000 distribution from a property syndicate and no tax is deducted by the company paying it.

If they were both retirees on zero taxable incomes, the franking credit of $300 would compensate the first investor for tax deducted by the company paying the dividend and under present policy would be refunded to him. Therefore, both investors would receive $1000 net.

An analogy would be a person who works full time and has tax taken out of their pay. When they do their tax at the end of the year, losses from activities such as negative gearing may reduce their taxable income. They will then get a refund of part of the tax deducted by the employer.

Now the unique thing about numbers is you can offer different interpretations. Shadow Treasurer Chris Bowen was recently quoted as saying: “Think about a nurse who earns $67,000 a year – we make her pay $13,000 in tax. Yet a retired shareholder with a substantial balance in superannuation could receive $67,000 in income with his fund paying zero tax. On top of that he expects the government to write the fund a cheque for $27,000. That is not OK.”

But there are many anomalies that could be described as “not OK”. Why should Chris Bowen get 49% back from the government on tax losses if he negatively gears an investment property, while the nurse gets back just 34.5%. Why should some politicians be allowed to access their superannuation before they turn 60?

Our superannuation system is designed to encourage people to invest for their retirement, which means people with money in super will often be better off tax wise than people out of it.

But our retiree has a lifeline. He could get around the franking credit changes by transferring his self-managed super fund to a retail or industry fund where the franking credits will be used to pay contributions tax and earnings for members in accumulation phase.

But there is one group who will be left stranded.

They are the self-funded older retirees who are not in super and can’t contribute because of their ages. Think about a self-funded retiree, not in super, whose income from dividends is $67,000 a year. Their taxable income would be $95,714, after adding on $28,714 in franking credits. Tax on that $95,714 would be $24,825 ($22,911 tax, plus Medicare levy of $1914) leaving a refund of just $3889. That’s way different to the $27,000 that the Shadow Treasurer is saying.

Furthermore, the retiree’s effective tax rate is almost 30% – the nurse’s is 19.4%. Is that fair?

Now think about a pensioner couple. They own their home, have $75,000 in bank deposits, and hold a share portfolio worth $710,000 returning dividends of $32,000 plus franking credits of $13,700. Their pension is $19 a fortnight combined, so total income – including franking credits and interest – is $47,700 a year.

Now let’s suppose the husband died suddenly, leaving all his assets to his wife. Her situation would change dramatically. She is now a single pensioner, and the assets she has inherited take her over the Centrelink cut-off point. She will lose her pension, as well as the concession card that goes with it. The good news is that under the existing rules she will keep the franked dividends of $32,000 – the bad news is that under Labor’s proposal she will lose the franking credits of $13,700.

Hopefully anybody potentially in this situation will have taken good estate planning advice to ensure a more effective distribution of assets when one party dies, so the survivor can retain a part pension and all the franking credits.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.