What is tax imputation? What are franking credits? and WHY does a franking credit refund exist in the first place? We need to start from the beginning. It is also worth noting that no politician came up with the idea of tax imputation, or any subsequent changes to the original rules. It is not their role to 'think up' rules which govern the fair taxation of all Australians, but to debate & pass into legislation.
Franking credits and the actual tax paid are not the same thing, but as you will see they do have the same value and are used in the same way. The idea being to allow tax to always be paid via a single method only.
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If Dave's business made $25,700 in profit and he paid it out as a 'franked' dividend: Without franking credit refunds Dave would pay $7,710 in tax ... With the refund Dave pays $1,425 in tax. If another business paid this out in another way they would pay $1,425 in tax. If that was your income as an employee, you would pay $1,425 in tax.
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There are some issues with paying out retirees franking credit refunds because of their 0% tax rate during the pension phase, but this is not a problem with tax imputation. If you see that as a problem there are many other solutions such as not providing tax refunds for large private companies but remaining in place for private business, cap the refund at a max value, or redefine the taxation rules for retirees and SMSFs so that they are not charged 0% tax on their investments.
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