Like many of us, I have had a hard time understanding Labor's franking credits policy.
I have a friend who is an economics academic, and he explained it to me in a way that was simple but factual, and now I believe I understand it well enough to explain it to other people.
So strap yourself in, here it goes!
Let's call the person who has shares Bob to personalise things a bit.
Bob buys some shares in a company. Hopefully, that company makes a profit.
If that company makes a profit the company Bob has shares in pays tax to the government.
As a shareholder Bob earns a dividend, the best way to look at a dividend is as a fraction of that company's profit.
Since Bob's dividend is basically income, Bob would typically have to pay tax on it - just like you and I pay tax on our salary.
But, because that income/dividend is coming out of company profit, and the government has already taxed that profit, a beaut little thing called dividend imputation kicks in to avoid tax being paid twice on what is for all practical purposes the same money.
Bob gets a "franking credit". Think of a franking credit as the government saying, "well, I owe you one" because the government recognises Bob's income/dividend has already been taxed. The government is allowing Bob to use his "franking credit" at tax time for a reduction in his tax liability.
Paul Keating introduced this system in the 1980s.
So far you'd say this is all fair enough, right?
But, this is where it gets interesting.
Former Liberal government treasurer Peter Costello changed the system in 2000 to say that not only can you offset your wages - but you also get the imputation credit paid as a cash refund.
Labor's policy is merely to reverse that change.
Bob still gets his dividends.
Bob can still claim it against his tax if he paid tax.
If Bob hasn't paid tax, he still has the "imputation credit" registered against his taxable income in case he pays tax in the future. Bob just won't get the imputation credit as a taxpayer-funded cash payment anymore if Labor wins the election on May 18.
The policy proposed by Labor saves taxpayers more than the annual federal budget allocates to public school funding currently. That's some $5 billion a year. Now you know what it all means you can make your own mind up on May 18.