Originally published in Pro Bono Australia.

Peak bodies in the social sector have welcomed news that charity and not-for-profit organisations will be exempt from a Labor Party proposal to scale back refundable franking credit arrangements.

On Tuesday, opposition leader Bill Shorten and shadow treasurer Chris Bowen announced plans to reform the dividend imputation system if Labor is elected.

This system offers Australian investors franking credits on dividends they receive from their shares, reducing the amount of tax paid by ensuring that company profits are not taxed twice.

But under changes introduced by the Howard government in 2000, an additional concession was created allowing shareholders paying little or no tax to convert these excess credits into a cash refund from the Australian Taxation Office.

The opposition’s reforms would ensure that imputation credits can be used for tax reduction purposes, but not for cash refunds.

However Shorten said in an address to the Chifley Research Centre on Tuesday, that charities and not-for-profit organisations would be exempt from the changes.

“Charities and not-for-profit institutions, including universities, are entirely exempt,” Shorten said.

This exemption has been welcomed by Philanthropy Australia and Community Council for Australia (CCA), with the peak bodies noting that franking credits ensure charities and foundations are not taxed through the corporate tax system.

Philanthropy Australia CEO Sarah Davies told Pro Bono News the organisation had strongly petitioned to keep the current arrangements for philanthropic trusts and foundations.

“We welcome the federal opposition’s commitment to permanently exempt charities and hence philanthropic trusts and foundations from their proposal to scale back refundable franking credit arrangements,” Davies said.

“Philanthropy Australia has strongly made the case that existing refundable franking credit arrangements should not be changed for philanthropic trusts and foundations, including raising this issue with the major parties before the last election.

“These charitable structures are income tax exempt for a reason – because they exist for the public benefit and focus on giving to the community.”

Davies noted that many charities also relied on income from endowments to ensure they were sustainable and could “continue to make an impact in our community”.

“Therefore, they should not be indirectly taxed through the company tax system – and current arrangements ensure that doesn’t occur,” she said.

CCA CEO David Crosbie said it was important that charities were excluded from this proposal.

“It is welcome news that charities have been excluded from the new measures capping imputation credits that have provided significant tax advantages to many high wealth individuals,” Crosbie told Pro Bono News.

“There are quite a number of charities that make medium- and longer-term investments in various equities. Tax imputation credits can contribute to the return on investment for these charities.

“It would be a very negative step to restrict the benefits of imputation credits for charities.”

St Vincent de Paul Society National Council Australia said it could not comment directly on the proposal since it had not yet analysed it in detail.

But in a draft budget priorities statement provided to Pro Bono News, the council said rising inequality and a growing demand for public services meant “getting Australia’s tax settings right is critical”.

“Further action is needed to remove generous superannuation tax concessions,” the draft statement said.

“Despite reforms to superannuation cap tax breaks in 2016, the super system remains heavily weighted toward the wealthy, siphoning off billions of dollars of government revenue each year into the pockets of those on the highest incomes.

“While the limits on tax breaks to high-income earners were a small step in the right direction… the overall system of concessions continues to erode public revenue, compounding wealth inequalities and providing tax avoidance opportunities for those who already have substantial wealth.”

Finance Minister Mathias Cormann labelled Labor’s proposal a “$59 billion tax hike” that “shamelessly” targeted pensioners.

“This is just shifty Bill [Shorten] at his worst trying to play firstly on his political rhetoric, using the language of class warfare and the politics of envy, while shamelessly targeting pensioners and self-funded retirees on lower incomes with what is a massive tax grab,” Cormann told ABC Radio National.

“What Bill Shorten is doing is bringing back double taxation for those Australians who are self-funded retirees, who are part pensioners, who have worked hard, saved hard all their life and put their money away and invested some of it in shares.”

But Shorten denied the proposal was a tax grab.

“This is [for] people who receive cash payments from the government, even though they’re paying no tax. So they’re getting a refund on tax they haven’t even paid. So this isn’t going to increase taxes,” he said.

“The reality is 92 per cent of taxpayers don’t get this cash refund. It’s really a matter of choices and priorities. My priority is to stand up for middle class and working class people, to make sure that they get a proper go in Australia.”

Labor said these changes will save the budget $11.4 billion over the forward estimates from 2018-19, with a $59 billion improvement over the medium term for the budget bottom line.