In this View, I am taking the liberty of expressing my personal frustration at the current franking debate. In particular, I am expressing my frustration with the prosecution by the ALP of its proposed policy to abruptly change taxation rules that have existed for decades regarding franking credits.
Whilst there is no doubt that important national policies must be dynamically managed, it is my view that this should occur inside an agreed and stable national policy framework. Over the last 120 years what is important to Australian society has become the responsibility of our government, our parliament and under their direction our bureaucracy and public service.
Therefore economic, social, healthcare, aged care and education, environmental, taxation, foreign policy, trade policy, defence and retirement policy (amongst others) is managed by government. In effect, they are our custodians for policy management and they should take policy forward so that each change is indisputably for the better.
Retirement policy by its nature must have a long term policy setting. Young workers today will participate in retirement policy for the next 50 to 80 years – from accumulation to pension. Recent retirees will be governed by policy for the next 30 to 40 years – managing a finite capital base to meet their needs. A Commonwealth pension safety net must endure.
All significant national policies should be managed by government with sensible, logical and fair adjustments made for changing circumstances or when a better understanding of the facts occurs. Any change should ensure that the aims of national policy are achieved. That is what the Government, answerable to Parliament and to the people, is elected to do. That is the basis of our democracy.
Consequently, there is a legitimate expectation that changes to policies inside an agreed framework are consistent, properly developed and agreed. National policy and significant changes to it should only be done after thorough investigation and research by or at the direction of Parliament. There is also the legitimate expectation that Australia’s most significant policy settings, that will endure for decades (particularly pension policy) will be set from a sensible bi-partisan approach.
This leads to my growing frustration with politicians of all persuasions and which I feel is a frustration that I share with many other Australians. Simply stated I perceive that there is a clear lack of sensible bipartisan agreement on the policies that are right for Australia.
The political debate is rarely supported by factual arguments and is arguably commonly undertaken with bias, a lack of integrity, transparency and/or honesty.
In particular disclosures of conflicts of interest by politicians are rarely if ever made before or when a politician argues their case. I wonder whether politicians themselves can honestly state they are abiding by the principles which the Hayne Royal Commission set for the financial services industry:
- Obey the law
- Do not mislead or deceive
- Act fairly
- Provide services that are fit for purpose
- Deliver services with reasonable care and skill
- When acting for another, act in the best interests of that other
Politicians and political parties constantly and seemingly on a whim change their positions on significant national issues. They, therefore, create distrust amongst the electorate and undermine the democratic system. The result is clear to see - directionless governance and a parliamentary quagmire with many members voted in by default – mainly in the Senate to create a hung parliament.
What is best for Australia should in most cases be obvious. When it is not obvious or subject to conjecture, it needs to be thoroughly investigated and researched by experts, from both commercial and academic backgrounds. The most intelligent, and hopefully the most ethical of our society, should be asked to develop the solutions that become the framework of our most significant national policies. The parliament should review and generally adopt the recommendations. National policy direction and its requirements should then been properly codified by parliament into clear law so there is no misunderstanding.
There are clear long term benefits for a country, for a society and for an economy, that adopts an agreed national policy framework or an agreed strategic and significant policy direction. This seems a fundamental requirement for Australia where society expects our government and parliament to manage fairly for all – including future generations. Citizens will readily support rules that are consistent with the agreed national plan – more so if it is properly created, recommended to and adopted by parliament and then clearly communicated.
That long introduction brings me to my annoyance with the ALP franking policy. I simply ask this - How can the ALP honestly and ethically develop or change the franking rules, that operate inside Australia’s retirement policy, without drawing upon a proper enquiry or investigation (ethical and intelligent) that supports it?
I find it particularly disturbing that Australia does not have a clearly enunciated national retirement policy by which success or failure can be measured. By not having such a policy then there is no basis to access proposed changes.
The proposed ALP franking changes, simply do not conform to the agreed national retirement policy of Australia because there isn’t one!
Australia’s superannuation system was created (theoretically at the time) to reduce the burden of a growing number of retirees/pensioners, on the Commonwealth pension scheme. The “safety net” of public pensions is funded through the taxation of the income of workers and companies and the returns on capital of investors. Since the creation of the contributory accounts based superannuation system by the Labor Government of the 1980s, Australia expanded its taxation base (via a GST) to deal with expected budgetary shortfalls. To this end the Howard Government created a convoluted and State-sanctioned GST, replacing state-based sales taxes, that today is almost impossible to change – even if it was for the better.
Readers will recall that it was Paul Keating who originally proposed the GST in 1985 but failed and then hypocritically argued against its introduction to defeat the Hewson Opposition in 1993. When John Howard introduced the GST in 1999 it was opposed by the ALP. So much for the creation of a national tax policy in Australia. Rather we observe a history of political interference with what should be done and little acknowledgement of the best taxation policies adopted by our overseas peers. I draw a similar conclusion when I look at the retirement policy of Australia.
Franking was introduced into Australia taxation law in 1987. Before and since that time some of the 36 OECD member countries (of which we are one) have flirted with franking. The majority have clearly dismissed it as a complicated and unnecessary system. Whilst there are easier ways to stop the double taxation of dividends Australia is just one of just five OECD countries to have a full franking system. The other 29 OECD countries that don’t have any form of franking generally have lower income and company tax rates than we do.
In 1999 the Howard Government changed the law so that franking credits would become fully refundable. So today (as the ALP claims) Australia is the only country in the OECD to have cash rebate franking.
So is there a problem with franking? Australia’s unique implementation of franking? Or is it the retirement system and its interaction with taxation policy that needs fixing?
The answer would clearly be uncovered by a properly convened national taxation or/retirement policy enquiry – but as we know that enquiry will not be held in the current political climate. Therefore Australia is left with a taxation system that is complicated and which excessively taxes income and risk capital whilst under taxing consumption.
In this vacuum, we are confronted by the ALP proposals to change the franking system even though these are inconsistent with what they previously described as good policy and over which they presided as Government from 2007 to 2013.
It is worth recalling that in 2000, Simon Crean as shadow ALP treasurer, said this when the Howard franking bill was debated.
“Under this proposal, they will obtain a refund of their income tax from the Taxation Office, representing the excess imputation credits. Labor included this proposal in our taxation policy prior to the last election. Therefore we have no difficulty supporting the proposal because it is our policy. It builds on the major reform accomplished by Labor almost 15 years ago and it improves the current taxation situation faced by low -income investors, especially retired Australians”.
Labor was in government from 2007 to 2013. It apparently did not occur to them, when they had the opportunity, that franking cash rebates were unfair. Nor did they conclude that they were unaffordable even as the budget deficit ballooned to record levels. It was the ALP that presided over a $27 billion deficit in FY09, a $54 billion deficit in FY10, $47 billion deficit in FY11 and $43 billion deficit in FY12 – creating a debt that continued to expand under the current coalition Government.
In 2010 the Rudd Labor Government formed Australia’s Future Tax System Review (The Henry Tax Review). The review had the noble ambition of guiding the tax system for the next 10 to 20 years. From 138 recommendations the Rudd/Gillard Government seemingly adopted just one (a Resource Super Profit Tax). The significance of the enquiry was its insignificance, in that it did not receive bi-partisan input or support. The opportunity to deal with franking was glossed over because it was not perceived as a problem for the budget.
The above table on closer inspection also exposes a subtle point regarding the significance of franking credit cash rebates. The ALP notes that in FY2000 cash rebates amounted to $500 million and this has now ballooned to $5 billion in 2019. Today Australia’s economy is 3 times larger than it was in the year 2000 ($650 billion to $2 trillion) and it is axiomatic that franking rebates will grow as the economy grows.
Whilst cash rebates have grown faster than the economy and now represent just 1% of budget revenues, it is the result of a growing self-managed super industry and the desire of over a million Australians to look after themselves in retirement.
The benefits of franking cash rebates have been accessed by people who trusted the law as proclaimed by both sides of parliament. The fact, which I accept, that a minority of people (less than 1% of SMSFs) excessively access franking credits is something that both the ALP and the Liberal Coalition could easily rectify. Why they don’t do so following an agreed tax/super enquiry is another reason as to why I am fed up with this franking debate and politicians generally.
The table below shows that those whom excessively utilise franked cash rebates are easy to
identify. Why is there not a reasonable benefit rule brought into the franking regime for the
benefit of an average self-funded retiree?
The ALP policy fails the public policy test. It is not designed to improve Australia’s retirement policy because there is no outcome to which either the ALP or indeed the LNP has committed to. Both parties have no sense as to what is a good national retirement policy and what Australia’s pension system should look like.
The fact that over 70% of retirees still need access to a full or part paid Commonwealth pension shows that we actually do not have a national retirement policy that works. So why is that not an issue in the current election?
What really annoys me about the franking debate
I noted earlier that I rarely see politicians who disclose their conflicts of interest prior to arguing a case for change or no change. Yes, there is a parliamentary register of interests but it is presumptuous to expect that 25 million Australians have this at their disposal as they listen to politicians argue for or against policy changes.
One clear conflict is seen for those members of parliament who currently negatively gear residential property investments and who will benefit from grandfathering laws even though they state that these taxation benefits are grossly unfair to average taxpayers.
Another conflict will be created when and if the parliament proposes and debates a proposal to change to the law regarding franking credits and SMSFs, whilst maintaining the benefits of old parliamentary schemes. How many politicians are beneficiaries of the old Commonwealth Defined Benefit Scheme with its grandfathered entitlements?
From 2004 to 2006, the parliament took several decisions to reduce the burgeoning cost of defined benefit superannuation liability. These included closing the Parliamentary Contributory Superannuation Scheme to new members of Parliament from 9 October 2004.
Shifting politicians and other public service employees from defined benefit to accumulation
schemes reduced the fiscal risks to the government (i.e. the taxpayer) and checked the growth
of the superannuation liability arising from civilian public sector employees. The massive
projected growth in the Commonwealth defined benefit liability is captured in the next table
from the budget of FY08.
Any parliamentarian who retains their pre-2004 defined benefits has a clear conflict of interest in arguing for changes to cash franking rebates that accrue to self-funded superannuation schemes.
Simply stated the politician’s conflict is this. Whilst the taxpayer has contributed by paying tax to fund my lifetime pension, I am not prepared to give it up. However, in the interest of “so-called fairness”, I support changes that take away franking cash rebates from retirees who rely upon them to fund their retirement. Whilst they relied upon government policy (which I supported) they can no longer do so because we can change that policy on a whim. However, we will not change a policy that grants me a lifetime indexed pension.
How does any politician argue that? The answer lies in integrity – or the lack of it.
The Future Fund of Australia has $150 billion of assets and is still apparently underfunded by $100 billion to fulfil its design to meet the unfunded defined benefits of ex Commonwealth public servants including politicians.
The Future Fund has not paid a pension to any of its beneficiaries since its creation in 2006. Indeed, it is not expected to pay a pension until at least 2026. By that time, it is hoped to grow to $250 billion in size whilst Australian taxpayers pay approximately $8 billion per annum in pensions for these public servants that will in the future include some current politicians.
To coin a phrase - how many hospitals and schools could be built if the Future Fund was today directed to pay its own pensions from its $150 billion fund?
In conclusion, I want to address the two furphies that are consistently stated by those who support the proposed cash franking rebates changes.
- It is claimed that members of SMSFs in pension phase pay no tax. Everyone (including pensioners) pay GST and that is tax; and
- It is claimed that pension members of a pooled super fund will receive a franked cash rebate under the ALP plan. They won’t. Franking credits (not cash rebates) will be generated by pension members but they will be used by accumulation members to minimise their tax. It is up to the trustees of pooled funds to arrange a debit to accumulation members and a corresponding credit to pension fund members inside the pool. The policy change as proposed results in tax being minimised.
Australia urgently needs a retirement (and a taxation policy) that is equitable and fair. It should be designed to endure and be appropriate for future generations. It should be designed to ensure that all Australians can look forward to retirement without fear because an appropriate safety net is in place. A safety net that everyone has contributed to during their working life.
Longevity risk needs to be factored in and SMSF pensioners equitably treated so they don’t become a burden on the social security system.
Most importantly, the policy should be designed so that future governments are bound by the national policy framework with changes only recommended and approved if they enhance the clearly stated outcomes.
I agree with all you have said but how do we bring about change? We used to vote governments out(time they went) rarely did we vote for the incoming party. ALP would have gone in on a landslide if they had no policies and said nothing. However we have a clear view on what the ALP want to do. It will be interesting what Australians decide. Is it too much to ask for a hung parliament and then bipartisan agreement and well drafted thought through long duration legislation that applies to all without exemptions. DONT KEEP CHANGING THE RULES EVERY YEAR!!
Thanks for this great article. Depressing to think of the depths to which political competence has sunk to in this country.
Labor plans to abolish tax refunds of unused dividend franking credits for those not on the pension, wind back negative gearing and the capital gains tax discount, reduce superannuation tax concessions, tax family trusts and restore for four years the 2¢-in-the-dollar budget repair levy on income above $180,000 a year, not to mention cancel the second and third stages of the Libs’ tax cuts. In other words, Bill Shorten and Chris Bowen plan to use both sides of the budget to affect the biggest redistribution of income from high income-earners to low and middle income-earners we’ve seen in ages.
Would all this be solved by all companies distributing dividends unfranked and individuals sorting out their tax obligations in their tax return as is the case with bank interest?
John, would be good to elaborate how you would personally be impacted by the franking credit changes? As the head of a relatively high yielding etf surely you would also have a pretty significant COI that would need to be disclosed?
Great article and truly depressing for a recent self-funded retiree with a small but essential franking credit at risk. Shameful politics and class divide.
One obvious thing you miss, which partly invalidates much of what you discuss. Interest rates have changed dramatically over the period examined. Rates as low as these were never envisaged by any component of the tax system. As a consequence, the desperate search for yield in tandem with the cash refund system has wreaked massive distortions on our capital markets, and weakened our long term growth prospects. The past and current strategies of the four major banks show this clearly, as does the preponderance of REITs and other rent seeking type vehicles listed on ASX. When economies approach extremes, which distort tax collections, you do something about it. The growth in cash refunds to the $5bn pa level is clearly a function of this yield chase and must be addressed. You are correct in that the 1999 amendments to facilitate cash refunds should never have been passed, or should have been repealed much earlier. They are clearly idiotic in that Treasury would reap no net revenue from a profitable company wholly owned by non-pension individuals. They benefit higher earners (shown in your chart and many others) and discriminate against folks with less/no shares serving to increase inequality in our economy. What has really annoyed me in this debate has been the sheer greed of people with multi-million dollar portfolios who figure this is going to send them to the poor house. They don't realise that by continuing this system of inequality, the impact on the overall economy and social life will be much greater. They also seem to regard superannuation as inheritance material, when the (unachievable) ideal is that the balance runs down to zero on the death of the last pensioner. Other assets comprise inheritance. Maybe we should have an inheritance tax like many other countries if the proposed franking changes are so bad? I totally accept your comments regarding long term planning and less changes, but drawing broad brushes between environments with cash rates of ~10% and ones at 1.5% (and falling) isn't appropriate. And the GST comment is particularly mischievous and unnecessary.
The franking credit debate unfortunately tends to understate the principle of fairness. 1. All investors, including all workers through their superannuation funds, should be treated equally. Under the Labor plan some will be given the benefit of the tax paid by the companies they invest in, and some will not. The only fair approach would be to abolish all franking credits. Why has no-one suggested this? 2. Retirees who have carefully made investments which rely on franking credits to give them an adequate income to be self-supporting without calling on the age pension will be most affected. Yet they do not have the option of gaining income by working to compensate for their loss.
Further to Andrew's comments, I also get peeved at many with SMSFs that have this attitude that their SMSF will pass onto their next of kin. No! The intent is to fund your retirement needs, so sell down a few assets to cover your cash flow needs
Great article John and a reflection of how many Australians are feeling frustrated and powerless in this current political environment. As an aside, we should be informed more generally of the investment property holdings of all politicians who support the changes in negative gearing, and if they intend to cease claiming the tax offsets against those properties if and when they are elected. I understand Tanya Plibersek, Anthony Albanese and Michelle Roland, to name a few, have five properties each.
The real inequity with this policy is that it will only apply SMSFs, and not to industry and retail superannuation funds, and for those who have in excess of $1.6mil in their SMSF it also won't have any impact ... it is discrimination of the worst kind but fits Labor's 'top end of town' nonsense. Bill Shorten enjoyed Dick Pratt's largesse for years and in 2012 when employment minister said that he found it hard to make ends meet on $330,000 per annum. Who can forget what Bowen and Shorten did to shareholders in MacMillan Shakespeare when they were last in power?
the issue is one of fairness, the idea that a couple with $3.2million in Super and each with $400,000 in investments outside of Super can draw down ~$200,000 income per year (2* $80,000 from Super, 2*$18,200 from investments and $3,300 SAPTO) which is not only Tax Free but also Medicare free since none of it taxable income is simply unfair and unsustainavle. It all goes back to Peter Costellos stupid 'tax free' pension decision which went against Treasury recommendation that it was unsustainable. Younger tax payers are paying tax, medicare, have a mortgage, bringing up kids and keeping these wealthy retirees in the lap of luxury. Removing franking credits was one way of making it fairer but it is pretty stupid. There should be a total review 'tax free' pensions - everyone should pay tax on their income. These wealthy superannuants are parasites on the rest of the working population taking all the benefits provided by C/W government - health, infrastructure, defence etc and paying nothing for it.
I wonder, somewhat ironically, whether your views are clouded by your own pecuniary interests. Moreover I can't see any argument in favour of the current franking credit scheme per se, your whole article boils down to "other people get perks, why are they taking mine away". BTW, the introduction of franking credit changes by the Howard government was just as abrupt and without any enquiry - it was a political vote grab pure and simple. That Labor continued with it until now is not surprising, they are politicians after all. Sometimes it takes time, and the right leadership, to come to your senses.
Great article, John. Please send to the Letters of Editors of major newspapers for your comments are worthy are wider comment. I note that the ratio of those who support your comments as opposed to those who don't, including some who have commented above, are 5:1. Those who have negatively commented on your article still don't get the point that ALP's current franking refund policy - which had previously been a bipartisan policy - is simply bad policy. Poorly targeted and most unfair. The majority of 'losers' under this policy are not the 'top end of town' and many will not be able to adjust to the loss of income.
Re Stephen Turners question or comment - "John, would be good to elaborate how you would personally be impacted by the franking credit changes? As the head of a relatively high yielding etf surely you would also have a pretty significant COI that would need to be disclosed?" - At present I am personally not affected as my super fund is in accumulation mode. My private family investment company is a long term investment company with a franking credit reserve. My future retirement plans - based on the law of over 20 years will have to be adjusted like hundreds of thousands of other retirees or those approaching self funded retirement. Many of Clime's direct clients will be seeking advice on the restructuring of their portfolio and personal affairs to adapt to the new rules. - Clime is not a ETF. Clime Capital (ASX code CAM) is a listed investment company. I am not sure it is a significant COI (depending on your definition) but to try to allay your concerns, the CAM board, like all LICs will have to review their structure if the franking rules change as proposed by the ALP. The conversion to a ETF or listed trust will have to be considered. If CAM did change its structure, the ALP policy will cause a cost to be born by our shareholders (conversion to trust) and then a significant loss of taxation revenue to the Government as distributions will be made pre-tax. If the major part of the LIC industry did this, driven by fiduciary duty, I am sure you can understand the consequences. Regards JA
The analogy of comparing FF dividends with interest, or other is flawed. The franking credit is the Australian tax already paid on the income to which it is attached. Whereas, in most cases, someone will have received a tax deduction for the interest paid.
They will not recoup gazillions from the franking credits as claimed as there is now a limit of $1.6M allowed in your SMSF. Excess funds must be withdrawn to your personal accounts and therefore fully taxable. Using figures from 2014-2015 is cheating as it no longer applies.
Excellent article. John refers to the franking credits fiasco as a debate. There is no debate. Eyes firmly shut, ears firmly blocked, heads deeply buried in the sand, Shorten and Bowen have repeatedly stated that this egregious policy will not be changed. And yes, we, my wife and I, will be very badly impacted.
Good comments by David Roberts and Ben Low----tax free super is the real issue!!! Yes, I benefit from both it and franking credits however do not see why my children with mortgages and children should pay more tax to support us who benefit.
“So is there a problem with franking?” Personally I didn’t think so. I think there is a problem with politicians who are transfixed with doing things “their way”, particularly leading up to elections and who are adept at explaining why things didn’t work as they expected, post election. Shorten is conveniently forgetting that the dividend franking rebate to SMSF retirees in Pension mode is effectively a “withholding tax” where company tax has already been paid, and is only “rebated” to the retiree after submitting the SMSF tax return. John correctly makes the point that Superannuation planning is a long term strategy to be considered over many decades. Politicians may plan for decades, but as we well know, only have to be accountable until the next election. We also well know, those same politicians, are more than well catered for for their superannuation entitlements, which are only ever likely to improve in their favour, well into the future.
Re Andy Brown’s commentary I have the following comments: 1) I don’t accept your comment re interest rates. “Real” interest rates are much more relevant than nominal interest rates. As you are aware the inflation of today is substantially less than 20 and 30 years ago and the market has adjusted; 2) I identified where the excess claiming of franking credits is. It is easy to fix and a reasonable benefit limit would be for the better; 3) The comment re inheritance tax needs a fuller analysis. However, I think that you and other commentary (Kerry Henry) need to acknowledge that SMSFs are principally trying to manage a capital and income base to ensure they can live comfortably in retirement and fund their own needs for aged care or disability care. The cost of entry into aged and disability care is between $300k and $500k today. It will be substantially higher in the future. Retirees have a legitimate concern regarding this cost/risk and they do not want to default into a public aged care system because they have run out of retirement capital. Please consider this issue properly as very few people move from retirement straight to death! 4) The claim that my comment re GST was mischievous is not supported by any clarification. Why?
Great Article. But to understand why our politicians act like they do and have a give give attitude to the biggest numbers of people. You need look no further than our democratic system. When you do, you soon realize sadly it is not a true democracy. Most would agree democratic means, freedom to choose. Yet Australia applies force upon it’s voters by way of financial penalty and even possible jail term for failing to vote (one of the very very few countries in the world to do so). Sorry THAT IS NOT DEMOCRATIC. Not hard to understand why politicians of any persuasion will promise, even lie to secure as many votes as possible regardless of costs or future impact on our country. To rub salt into a festering wound, politicians even get paid for every vote received (about $65million at last federal election) There is no doubt we have a major problem with our political system in this country. Treating the symptoms, won’t solve this problem. Fixing the cause of the problem is what’s needed here. Regards Bill
Thank you John. An excellent piece. I find some of the feedback quite disappointing. Comments such as "these wealthy superannuants are parasites on the rest of the working population taking all the benefits provided by C/W government - health, infrastructure, defence etc and paying nothing for it" are both mean-spirited & wrong. Whilst there may be a small number of very wealthy superannuants, the vast majority are not. The ATO data shows this. All of the older members of our community have paid taxes all of their working lives & they should be entitled to financial certainty at the time of the life where they are not in a position to react to any legislative changes which impact their retirement funds. Shame on all of us for not defending these people. Best regards, Rob Barnett
They're not changing franking credits, they're changing the silly and costly refunds Howard introduced. This is a straw man argument
SMSF members with amounts over the $1.6m tax free level will still get franking credit rebates on the accumulation account. On the above chart it will make very little difference to the tax “saved” by not allowing cash refunds to us mortals with less than $1.6m in pension mode. There must be a better way.
The franking policy change is the right thing to do for society as a whole and the taxation of companies contributing to government provided services. It came in abruptly as a policy as it will leave and was a vote buying exercise during a boom time of budget revenue rather than good policy. The company tax take has been so seriously eroded by this Howard policy and is completely unsustainable that that action must be taken soon.
Mr. Abernethy raises many pertinent points worthy of agreement. However, there are some matters on which I disagree & others on which I seek to comment. 1. Governments have always made "adjustments" to superannuation policy, which was a well known risk. 2. There were no howls of protest when the Lib/Nat Government introduced the illogical imputation credit cash gift to SMSFs in pension mode. That was a change that flowed through unchallenged. 3. I'm a self funded retiree, with most of my income derived from shares held outside the protected environment of superannuation. Consequently, my income is fully taxed, with my franking credits directed to offset my tax obligation, as was the original intention. I know several other retirees, mainly women, in this same circumstance. Therefore, I find it galling that we pay tax to support a "gift' of franking credits to untaxed recipients of superannuation pensions. 4. The cash back policy was based on the income to the Fed Govt from the mining boom, setting up an ongoing cost based on a short term glut of revenue. Prudent financial management would have been better served by directing the funds from the boom to a future fund to benefit the country during future downturns, which inevitably arise. So much for the claimed "superior fund management skills" of the Lib/Nats. Marcia Moseley
Super is not tax-free. Contributions have been taxed, as have earnings. While funds are withdrawn after retirement without ADDITIONAL TAX, the total effective tax over 30 years of accumulation is about 30%, and about 35% over 40 years of accumulation. My MBA students have done this calculation as an assignment for several years. These are average tax rates on every dollar. Under the current personal tax rates annual income has to be $140,000 before tax averages 30%, and almost $240,000 to average 35%. Super is already highly taxed before retirement withdrawals. This 'already taxed twice' fact has been totally ignored in the non-debate.
Fine article John, albeit late in the day re election outcome. Personally, I am frustrated at the lack of response by the Government to nearly a year of prompting to attack the “loophole”/gift/bonus/subsidy line from Shorten, given Labor were always going to have to defend Bowen for a poorly developed policy. The only other point I would make is the Labor hypocrisy re imputation, given their willingness to tax at 47%, even proposing to raise to 49%, and then let after-tax assets go to super so as to then later deny excess refunds on super earnings. And it is the imputed earnings and their growth that sees the budget in surplus, yes I note current year surplus, so that the whole exercise is unwarranted as pointed out by Rice Warner. John Simkiss 16/5/2019
There will be unintended consequences from the ceasing of cash franking credit rebates. Plenty of people who are around marginally self funded are selling or preparing to sell down in part some boring franking stocks and hoping to make the difference up through some growth and spec investments. We all know where that will end. Non deductible capital losses and an application for the aged pension. Not to mention the self funded reducing discretionary expenditure. What Bill does not appreciate is the contribution that self funded retirees have made to the budget during their working life. The contribution continues during retirement. A single self funded retiree drawing $64k on $1.6 million in a pension phase Super fund is FORGOING around a minimum $28k in Pension and concessions compared to the choose of spending big during their working life.. So Mr Shorten THAT IS A GIFT!!!!!!!! That is 44% of the income!!! The savings to the budget for a life time of hard work and saving is not recognised or appreciated. As you say there should be a National Plan for Super. When you put money into Super you enter into a contract with the Government that you will not access the money until you are at retirement age and will forgo all or part of the aged pension. A contract way in favour of the Government. Plus the fine print says you cannot change the contract but the Government can make changes it its discretion/whim. What a 'crock'. In the 1950's a pollie like Bill would have been labelled 'Pinko Bill' for his equalisation aspirations. Ie redistribute the hard earned to..... Anyway I can visualise the younger go getters/strivers having a laugh at this but believe me your turn for the big whinge will come sooner than you think.
John, One thing you glossed over about the franking credit history was the change in the taxation rate for over 60s superannuants to 0% in 2006 (I think) well after the change in franking credits. I do not think Simon Cream could have foresaw that ( did anyone?). Therein lies the problem, it is not the franking credits, it is the 0% tax rate. NO government will ever have the guts to unwind that ridiculously overgenerous and almost arbitrary policy, could you imagine the outrage if Labor proposed even a review of that policy. Thus, both the Coalition and Labor play around at the edges with the various caps and massive complexity introducing by the Coalition and franking credits under Labor. Yes, the Henry review needs to be revisited but I don't think any political party has the will to do it mostly because they know there is no appetite for it in the electorate. Bob
RE Ben Low’s comments. My view is very clear and it resonates through my article. Australia needs to develop a National Retirement Policy by which future changes can be assessed as to whether they enhance the policy or not. Whether franking does or does not survive such an enquiry should be decided by intelligent and ethical people and adopted by Parliament. Clearly therefore I am seeking the best Retirement Policy for Australian and it has nothing to do with a pecuniary interest.
John- your article has clarified a few more things for me. Thankyou. I liked your response to a couple of queries that were pointed at you. I'd like to declare my interests. I have a SMSF - We do get franking credits, but nothing like Shorten seems to think, far from it, and if these laws are passed I will make changes so that these credits will be used up, which may involve taking higher risks with investments , but hell if I loose my super I'll go on a government pension, and who'll pay for that then? I have NEVER collected government money OR unemployment benefits, even Rudd's hand out's during the GFC. I have never been unemployed- but did jobs that were not good paying, I had a house loan when the interest rate was 17%, and a small 7 day business at the same time. We have never defaulted on a loan. We paid our taxes EVERY YEAR and super contributions and planned for retirement, our investment decisions were made for the long term. I have not excepted " Gifts" not like some of the politicians have over the last few years and WE have contributed to our government and systems, through the ATO, and still do today and probably till I die, and MY parents did like wise. The tax has been paid on these credits-" no gift". Don't double dip -Bill.
Very interesting article. Like a few others, there are some points I agree with and some that I don't. I do find it hard to agree with the argument that the change is totally unfair. As I have said to many people those that benefit the most from the current policy are those that "pay no tax". They can, and have, set their affairs up so that they get a REFUND of tax that another entity has paid. How does that make sense? Our politicians are the people we vote in, we do need better politicians, and definitely less lobbyists What stops you from standing John? Also the argument that 'people have paid tax all their working life and deserve.......' no longer holds water. People now live longer and most cost society large amounts in medical bills etc. If they continue to have earnings through their investments then surely they should also be paying tax!
Fact 1. Imputation credits were introduced with the express purpose of avoiding double taxation on company profits where the company had paid tax on those profits. Fact 2. Tax free pension mode was introduced in 2006, not “decades ago”. It was never intended that the company profits would have zero tax. It was one of the middle class boondoggles that Howard and Costello came up with during the period the Government was awash with money from the resources boom. It was poorly conceived and ultimately unsustainable. Have I benefited from it - sure have. Will I miss it - no doubt. Is it correct to remove it yes, but it should not have had any exclusions for it to be correctly implemented.
To Shaun Quinn Thank you for your comment. I am saying in the article that the change is unfair given: 1. It could have achieved a fairer outcome if a Reasonable Benefit Limit was introduced; and 2. The proposed change addresses a clear problem but in a superficial and seemingly intentionally limited or biased way. I reiterate that changes are needed to the Retirement/ Taxation policy settings of Australia. I am not convinced that franking is a great policy and the majority of OECD Countries don't think it is either. Get the policy agreed and documented first before making changes. Then ensure that subsequent changes meet the test of improving the policy outcome fairly and consistently. Regards JA
Thanks Mark McLaughlan Your comments reiterate my view that a National Retirement and Taxation Policy has to be set with the principles and objectives documented. Again your comment notes that changes have consequences. Thus with no clear objective imbedded in a National Policy you get the consequences of which you complain. Regards JA
Given the policy history trail of Asprey, Campbell, and Ralph followed by the Henry Report, it is certain that John is correct that a major inquiry should have proceeded such a major change. Further, there is no excuse for failure to “grandfather” nor to consider better alternatives. What is clear from the granular tax detail recently released is that neither the Government in its pre-2016 election changes nor Labor in it’s current policy has gone far enough to curtail/remove the extremely large asset balances over even limits as high as say $5-10 million per member. Where to now with that potential initiative? Bi-partisan post election? Will be fun to watch. John Simkiss 17/5/2019 PS My wife and I have a SMSF and of course we are hit but my real concern is the sad state of policy discussion as exemplified by the lack of real debate on this issue. What to do for ourselves, is a wait and see.
Excellently put. Change can only come when we stop Party Staffers, with no real world experience, entering parliament as a career move! Dan May below hits it firmly on the head by suggesting making it the responsibility of the investor to pay the tax. Shifty would then understand that that might require a bit more cost in the collection process by increased complication. What is also forgotten is that the reason some of us do not have bigger balances is that we had to pay 60cents in the dollar marginal tax rates whenever we had a good year.
This is a great article and (almost) comprehensively sets out the case for retention of franking credits as they are, but it does not cover one of the most important issues that suggest the policy is fundamentally discriminative. That is, it seems that the Labor Party ( I wish they would finally get the spelling right!), does not understand the principle of symmetry in tax matters particularly. In this case it seems it is "unfair" to pay a taxpayer a refund when their individual tax position is less than the company rate, but it is apparently quite fair to tax the next individual a higher rate when the opposite circumstances apply. This smacks quite clearly of the "heads I win - tails you lose" principle - one that seems to be in abundance within Labor ranks. This is especially so when the "policy" is based on a microscopic sample of SMSFs involving millions of dollars.
Agree totally with your article. The other group overlooked are low income earners (outside of super or pre-retirement.). There are roughly 137,000 people under the $18,200 threshold who will lose 30% of their share income under Labor’s proposed policy. Many people have left work to raise children, care for family members, or due to health reasons. Too young for a pension. I just heard Tanya Plibersek on tv complaining about 64 millionaires who pay no tax to justify closing so called “tax loopholes” The problem is Labor’s policies won’t affect these wealthy people. But will cause significant difficulty to the 137,000 low income earners relying on dividends to meet rent and basic living expenses. This policy is regressive and grossly unfair. I welcome sensible debate on superannuation RBLs, but wish everyone was aware of the enormous collateral damage Labor’s I’ll considered policies will have on low income earners.
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