Federal Labor's proposed changes to dividend tax credits have been hotly criticised, with shareholders and the superannuation sector saying the changes will hit lower-income retirees hardest and potentially disrupt the share market.
Labor leader Bill Shorten announced a plan on Tuesday under which his party would scrap the current arrangement that allows share owners to claim a cash refund for unused dividend imputations.
Dividend imputation is the system under which shareholders receiving share dividends get a tax credit in recognition of tax already paid by the company.
Those shareholders can offset the credit against their other income.
But Labor says, if it wins government, it will no longer give cash refunds to people whose taxable income is zero.
The Australian Shareholders' Association says political tweaking of the tax system is jeopardising the planning of self-funded retirees.
"The potential for ongoing tweaking throws retirement planning into disarray," ASA chief executive Judith Fox said on Tuesday.
Ms Fox said retirees and future retirees have structured their investments to take into account the receipt of dividends from companies that pay tax in Australia, knowing that excess tax paid will be refunded.
She said Labor's proposed changes will hurt investors who prefer companies that pay high dividends and which have already paid the 30 per cent corporate tax to the Australian Taxation Office.
The Association of Superannuation Funds of Australia said Labor's proposal would hurt "mum and dad investors" through their superannuation and through the shares that they own outside of the superannuation system.
"At a time of increasing longevity and rising costs of health and aged care, it's critical that we do everything we can to maximise income for retirees," ASFA chief executive Martin Fahy said.
Dixon Advisory, which provides advice to more than 8,000 trustees in self-managed super funds, says the people most likely affected by Labor's proposed changes are people on zero tax rates - mostly industry, retail and self-managed superannuation pension accounts.
It will also affect low income earners who have shares in their own name.
"There are lots of small parcels of shares held by mum-and-dad investors from floats, like IAG, AMP, Telstra and Commonwealth Bank," Dixon Advisory head of advice Nerida Cole said.
"The most likely group to be affected will be retirees because they don't have any other employment income that they can offset the dividend credit against," she said.
Ms Cole said a retiree with $100,000 in Commonwealth Bank shares could be up to $2,500 a year worse off under Labor's proposed changes.
The loss of income could force some people consume their assets more quickly and end up on the age pension sooner.
The Tax Institute described Labor's proposed changes as a grab for "politically low-hanging fruit" because it could be done with little legislative change, would save $11 billion in revenue, and would cause minimal damage to Labor's constituency.
The Tax Institute also said that the proposed changes could cause ructions in the share market, where tax refunds of excess imputation credits are an important part of investors' decision to invest in shares.
