Before the election, PM Albanese and Treasurer Chalmers were very clear about promising to keep their hands off franking credits. The memory of the electorate’s treatment of Bill Shorten in the 2019 poll was hard to forget. However, today, The Australian tells us that not only is the Government set to take away some franking credits, it also reveals Treasury thinks the public will see the proposed changes as an increase in tax.

Not all franking credits are under attack just now, but many are thinking this is only the tip of the iceberg. The legislation put to Parliament this week hopes to take $600 million of franking credits off taxpayer investors and super fund members.

Franking credits were created by former Labor PM Paul Keating, to reduce a double tax on profits. A company pays 30% tax on its profits. When it pays a dividend to a shareholder, that dividend has been hit by the 30% company tax.

If the shareholder is in the 0% or 19% tax bracket, they get a rebate of 30% or 11% (that is, 11% plus 19% equals 30%). If the taxpayer is in the 45% tax bracket, they pay an extra 15% on the dividend income. However, before Keating’s changes, that person would’ve paid twice — 30% via the company’s tax payment plus 47%!

Companies deliver $67 billion worth of franking credits mainly via dividends. While these aren’t under attack yet, $600 million are, which are linked to two actions by companies that favour many shareholders. The cost of these $67 billion of franking credits is $17 billion to the Budget bottom line.

First, companies using favourable tax treatment for off-market share buybacks (OMSBB) with attached franking credits. This could be changed and it will save the budget $550 million over the next five years. Sometimes companies have so much profit they decide to share it with shareholders by buying back shares. This not only helps raise the share price, it also gives the shareholders (i.e., owners of the company) tax credits in the process.

Second, companies can return excess money in the business via a special dividend and that too comes with franking credits.

Dr Jim Chalmers keeps calling it “integrity measures”. Maybe an accountant or an economist working for Treasury might use this because it’s a tax cut for some Aussies but not others — but that happens all the time. Lots of taxpayers are in the 0%, 19%, 32.5% and 37% tax brackets, while others are in the 45% top tax rate. The tax system does punish the well-paid talented and hard-working toilers relative to others, so should we call that a system based on “integrity”?

Assistant Treasurer Stephen Jones says that “…the vast majority of investors will be completely unaffected and will continue to receive their franked distributions”. However, many are worried that this is the tip of an iceberg that’s coming for four big groups.

“An estimated $17.2bn of these were claimed by 3.1 million residents on their individual tax returns that year, with the remainder flowing to other local entities including other companies, superannuation funds and charities or overseas,” Simon Benson from The Australian reports.

Treasury thinks the integrity issue is linked to shareholders getting a benefit from the tax-saving implication of these actions of share buy backs and special dividends, which reduce the potential capital gains tax collected with these practices.

And they might be right. But Albo and Dr Jim got our votes on a promise not to touch franking credits, so it’s reasonable to ask this: what other tax promises will they break next?

Get ready for Albo and Jim to remind us of one of the great political sidesteps of all time, put on by PM John Howard.

This from The Conversation’s Misha Ketchell is worth remembering: “In the lead-up to the 1996 election, John Howard was asked directly whether he would stick to his promises regardless of the Budget’s state. But, with the aid of the Commission of Audit set up by Peter Costello, Howard invented the category of ‘core’ promises, which would be kept. The public was left to infer that everything else was ‘non-core’.”