Labor government ‘milking’ self-funded retirees from proposed franking credits policy
Labor’s franking credits policy continues to come under fire as hundreds of thousands of Australians learn more about how the proposed policy will impact their retirement nest egg. Labor government’s policy to abolish franking credit refunds for everyone but age pensioners has been described as a means of ‘milking’ self-funded retirees. The policy is expected to increase government revenue by $56 billion over a decade.
The crux of the issue is that retirees, who in good conscience saved money in super, are having the rug pulled from under them. They are being treated as companies, effectively being taxed at 30 per cent on part of their income, with their tax-exempt super status being ignored.
Ordinary Aussies, in a wide range of superannuation funds, will have their savings slashed by Labor’s franking credit tax – according to evidence provided by the Financial Services Council (FSC) to a parliamentary inquiry examining Labor’s proposal.
So who is affected? The ATO’s Taxation Statistics publication estimates that around 33% of cash refunds go to individuals, 60% to SMSFs and 7% to APRA regulated funds.
External affairs manager Craig Laughton – of the professional accounting body, CPA Australia – told the inquiry that the policy needed to be “calibrated” and that the CPA couldn’t support the current plan as it would hit many “mum and dad” shareholders, whereas the tax system expected those that could afford to pay more, do so.
Economists say dividend imputation seems expensive but offers ‘social benefits’, such as boosting consumption in retirement or reducing the amount workers need to save in superannuation before retirement
One retiree, Peter, claimed he had been a Labor member since 1972. “I resigned from the Labor Party the day that Bill Shorten and Chris Bowen announced this policy,” he said.
Another, Geoff, said the move would cut his income from $55,000 a year to $40,000. John, who gets $13,000 in franking credits a year, said the problem was that richer retirees were “rorting” it. “What we need to do is cap the amount of refund,” he said.
Another self-funded retiree, Tom, pointed out that many people had been forced to invest heavily in shares because of the poor returns elsewhere. And this would only make the impact of the policy worse. “Because of exceptionally low interest rates, we have all been forced to put more into shares just to generate any sort of an income,” he told the inquiry.
Associate professor Geoffrey Warren – a co-author of a research paper at the Australian National University – told Guardian Australia, “Part of the government policy is to support people to support themselves in retirement, and this will make that job harder. More people will be caught in the net.”
According to the research paper’s new modelling, self-funded retirees would have to boost their savings by up to 9% to make up for Labor’s proposal to end cash rebates for excess imputation credits.
The three economists from Australian National University also found that dividend imputation helped retirees boost their consumption by between 5% to 6% and created a “significant bias” in favour of Australian shares in retirees’ portfolios.
Around 900,000 Australians stand to lose an average of $2,200 a year under Labor’s planned changes
Labor has downplayed the significance of the report, noting that it does not model its changes exempting pensioners, and that it acknowledges that high-income earners would be hit hardest by the policy.
The research paper found that dividend imputation “delivers considerable value to retirees”. It found that on average, retirees would need to boost their superannuation balance at the age of 65 by 8% to 9% to make up for not being able to claim franking credits in retirement.
For example, a retiree with $200,000 in superannuation would need $16,540 to make up for the loss of dividend imputation, rising to $43,069 for a person with half a million in retirement savings.
The paper argues that although the cost of dividend imputation “may seem relatively expensive” it offers “social benefits”, such as boosting consumption in retirement or reducing the amount workers need to save in superannuation before retirement.
It also states that access to imputation credits in retirement therefore helps address the issue of adequacy and reduces the need for a higher superannuation guarantee levy.
Creating uncertainty for retirees and the superannuation industry
Having saved and worked hard for many decades to prepare for retirement, the proposed ALP policy has now created uncertainty for retirees.
What started off as a hit on individuals and self-managed funds has now been revealed as a massive grab across the board affecting millions more hard-working Australians who are saving for their retirement.
The Australian Financial Review reports the extent of Labor’s tax grab:
“As many as 2.6 million people in large superannuation funds will be affected by Labor’s franking credit changes, the Financial Services Council says.
If elected, Labor will make excess franking credits non-refundable, denying some retirees a cash refund at tax time.”
In its submission to the federal parliament inquiry into the implications of removing refundable franking credits, lobby group National Seniors says its membership believed the policy betrays retirees’ core values of self-reliance and self-sufficiency. It has urged the federal opposition to scrap the policy.
The policy will hurt ordinary Australians and not just the wealthiest, as Labor claims
Whilst Bill Shorten’s plans to axe refunds for imputation dividends attempts to largely target people in Coalition seats, government analysis shows that the policy will also impact more than 300,000 voters in Labor electorates.
In response to Labor’s proposed policy, the Alliance for a Fairer Retirement System has since been formed. “This is an unfair outcome for people in retirement phase, and a targeted tax on a popular asset class which is not replicated anywhere else in the Australian financial system,” it says.
In a web poll run by Wilson Asset Management, 70% of respondents said they would lose between $5,000 and $30,000 a year if franking credits were no longer refundable.
“Labor has pushed this ill-conceived policy by claiming it would only hurt the rich and deliver significant savings for the government,” Mr Wilson said. “Far from being ‘rich’, 69% who completed our poll earn $90,000 or less a year and 53% would be forced to reduce their family’s living standard and quality of life in order to accommodate the loss of income.”
Queensland Independent Fraser Anning said the proposal from Labor was “nothing more than another socialist retiree tax”. “It seems the Labor Party of today doesn’t have the same regard for the battlers, the hard-working or the thrifty, but instead reward the lazy and the feckless,” he said.
Retirees would need 9% more savings under Labor franking credit plan
While anger over the policy has been largely from those with self-managed super funds, as some observers have claimed that non-SMSFs will not suffer, the Financial Services Council (FSC) claims more people in large regular funds will be affected than any other group.
The Australian Financial Review Reports:
“In 2015-16, refunds were worth $235 million to large super funds, with 50 funds receiving refunds,” the FSC said in a submission to a parliamentary inquiry examining Labor’s proposal.
“The average refund was $4.7 million per fund. There were 2.6 million accounts in these funds, so up to 2.6 million Australians benefited from refunds in these funds.”
The Liberal Party argues that 84% of the 900,000 individuals impacted were on taxable incomes of less than $37,000, with 96% on taxable incomes below $87,000. Almost half were aged over 65.
It further claims the average impact on the 200,000 self-managed super funds hit was $12,000 a year, with the policy putting extra pressure on funding the Age Pension over time.
About 900,000 Australians stand to lose an average of $2,200 a year under Labor’s planned changes.
“Retirees and those approaching retirement were unhappy, distressed and were greatly worried how they would pay their bills, such as medical costs, if the ALP policy was introduced.”
Mark Freeman, CEO of Australian Foundation Investment Company (AFIC)
Retirees had trusted the government, saved for their retirement and wished to be self sufficient, but now this is being put at risk.
Australian Foundation Investment Company (AFIC) chief executive, Mark Freeman, gave evidence before the standing committee on economics inquiry in November and said it created an unfair situation where superannuation funds could still access granting credits while individual investors, many of them low to middle income earners, would not get the refunds under the ALP policy.
Retirees and those approaching retirement were unhappy, distressed and were greatly worried how they would pay their bills, such as medical costs, if the ALP policy was introduced, Mr Freeman said.
The issue was also constantly being put to AFIC by shareholders who were distressed by the ALP policy proposal. “Another observation from those shareholder meetings is that many of those impacted are on a very modest income and not rich,” Mr Freeman said.
“There are many people talking about how they will struggle with medical payments,” Mr Freeman told the committee.
“We believe the ALP policy may represent a ticking time bomb for the whole superannuation industry.”
Dr Don Hamson, Managing Director of Plato Investment Management Ltd
Taking money offshore to overseas listed companies
The chief executive of Argo, the nation’s second biggest listed investment company, told the committee that those Australians investing in Australian equities, many of which pay high franked dividends, would be disadvantaged by the ALP franking credits policy.
Jason Beddow also said the removal of franking credits could make overseas shares more attractive to local investors as they switch their equities strategy.
This is because investors with higher allocations to Australian shares, or allocations to higher-yielding Australian shares could earn even higher levels of franking credits. They stand to lose more if franking credit refunds are denied.
This has already impacted some Australia listed companies that provide franking credits, with their share price significantly declining, since Labor’s policy proposal. And with speculation mounting of a Labor government at the next election, more self-funded investors are likely to sell their shares in such companies and invest elsewhere.
Policy may represent a ticking time bomb for the whole superannuation industry
Self-funded retirees also argue the fact that the decision as to who gets cash franking credits is decided on the basis of the choice of fund manager is completely outrageous.
Dr Don Hamson – Managing Director at Plato Investment Management Limited – says that while many SMSF members have been vocal critics of this proposal, he believes members of other superannuation funds probably aren’t aware that they receive franking credit refunds (they are not reported on investment summaries) and probably won’t know whether they might miss out on franking credits should this proposal be enacted.
Dr Hamson suggests retirees or their advisers should ask: Will my superannuation fund lose net franking credit refunds?
As more members migrate to pension status, the loss of franking credit refunds will impact a growing number of people, be they members of government, industry, retail or SMSFs.
Based on superannuation modelling conducted by Dr Hamson, “We believe this proposal may represent a ticking time bomb for the whole superannuation industry.”
Why Labor’s policy won’t impact the rich, only middle income retirees
The reason the rich continue to benefit is that with the relatively recent balance transfer caps, only $1.6 million can be held in a tax-free super pension per person.
For those with money in super above $1.6m, the excess needs to be held in the super accumulation account, taxed at up to 15% on income and gains.
In other words, because the ultra rich will still have significant funds in the super accumulation account that attracts 15% tax, they will continue to use franking credits to reduce tax on the accumulation account, and therefore may be largely unaffected by the policy change.
But it is the people in the middle who are hardest hit, deemed too wealthy to receive Centrelink benefits, but not wealthy enough to have more than $1.6m in super. They will feel the full force of the Labor imputation credit changes.
For the $1m SMSF with a retired homeowner couple as trustees and members, they’re over the threshold of $848,000 to receive a part age pension, and thus targeted by the Labor policy proposal. If they held 25% of the super fund in fully franked shares paying an average 6% dividend, that equates to franking credits of about $6,500 a year at risk of being lost.
An incoming Labor government will struggle to legislate its key tax increases with almost the entire Senate crossbench opposed to its plans to abolish cash refunds for excess franking credits (and none prepared to support the limiting of future negative gearing to newly constructed homes).
Financial Review, 11 December 2018 – Phillip Coorey
There are so many variables that working out the best outcome, both now and into the future, is confusing and highly mathematical.
The savings to the Budget are estimated to be $10.7 billion over 2019/20 and 2020/21, and $55.7 billion over ten years.
But the people most likely to be affected are not the mega-wealthy but the hard-working mums and dads who diligently contributed into super over the past 20 years under the assumption it would be a protected environment that would allow them to draw an income stream in retirement.
Franking Credits – Quick Facts:
- Women will be hardest hit – 72% of women and 69% of men over the age of 75 claim franking credits, with an average of $6,561 and $5,993 respectively.
- Over 1.1 million individuals are currently receiving franking credit refunds.
- The average franking credit refund for an individual is less than $10,000, making up, on average, 30% of a retiree’s annual income.
- 75% of SMSF franking credit refunds are less than $15,000.
- Hardest hit will be self-funded retirees, but the broader public will also lose via falling share prices and lower superannuation returns.
- Retirees can’t go back to work, so hundreds of thousands of retirees will be forced onto the pension, pushing the burden back onto the taxpayers.
- 51% of men and 63% of women over the age of 65 have no superannuation according to the ABS (Australian Bureau of Statistics).
Read Geoff Wilson’s 2-page PDF Backgrounder on the proposal to remove franking credit refunds. Published by Geoff Wilson of Wilson Asset Management, who is one of the key individuals fighting Labor’s proposed policy on behalf of retirees.
Want to take action?
Below are links to organisations that are making a stand in protest of Labor’s policy:
- Advance Australia is also petitioning for the policy to be scrapped, called “HANDS OFF MY SUPER!” To sign the online petition, click here.
- Wilson Asset Management has also started an online petition to ‘save’ franking credit refunds on May 11. Sign the online petition here to save the current dividend imputation system.
The National Seniors franking credit submissions can be found at www.nationalseniors.com.au/franking-credits
What is a dividend imputation?
When companies pay dividends to Australian shareholders out of after-tax profit, shareholders receive franking credits, a credit against their own tax bill based on the tax paid by the company. This system, which is known as”dividend imputation”, is unusual – only four other countries in the world use it.
However, in 2000 the then treasurer, Peter Costello, made the system even more generous to shareholders by allowing them to claim a cash refund if they received more in franking credits than they owed in tax.
Many retirees have structures their retirement savings and investments around the tax credits and will face a significant drop in income if the proposal is implemented.
The Labor Party’s plans to make a retrospective change to super not only adversely affects about one million retirees who are not eligible for a part or full age pension, but also undermines the confidence in the system.
What is the exemption?
Just two weeks after Bill Shorten announced Labor’s policy on franking credit refunds, Labor buckled under pressure, declaring that all Australians on the age pension would be exempt from the policy, amounting to 227,000 people on the full or part-pension.
– Labor ‘milking’ self-funded retirees. The Senior. News, December 2018.
– Millions More Lose Out Under Labor’s Super Tax. Advance Australia. 14 November 2018. Read article
– Shorten’s tax grab to sting 300,000 voters in ALP seats. The Australian. Simon Benson. 25 November 2018. Read article
– People in the middle lose out in ALP’s franking credit crunch. FinancialAdvisor.com.au. James Gerrard. 23 November 2018. Read article
– Angry retirees urge Labor to apply a franking-credit cap. The Australian. Michael Roddan. 22 November 2018. Read article
– Retirees would need 9% more savings under Labor franking credit plan – report. The Guardian. Paul Karp. 25 September 2018. Read article
– Investors ‘distressed’ by Labor’s franking credit plan. The Australia. Eli Greenblat. 22 November 2018. Read article
– Labor’s franking policy is a ticking bomb for all super funds. Cuffelinks. Dr Hamson. 4 October 2018. Read article
– Australian Labor Party tax reforms – dividend imputation credits. IOOF. Read article
– Labor on the ‘wrong side of history’ with franking changes. Wilson Asset Management. Joanna Mather. 11 August 2018. Read article
– Franking change will hit ordinary super funds too. Australian Financial Review. Joanna Mather. 13 November 2018. Read article
– Labor faces stiff Senate opposition to key tax hikes. Australian Financial Review. Phillip Coorey. 11 December 2018. Read article
– ‘It’s not their money’: retirees vent anger at Labor dividend tax plan. Sydney Morning Herald. Colin Kruger. 20 November 2018. Read article
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