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Bill Shorten’s Attack On Your Superannuation

Recently Opposition Leader Bill Shorten announced a direct and unprecedented attack on your superannuation fund. In a controversial move, he proposes to end cash refunds on excess dividend imputation credits, garnering an estimated $59 billion over the next decade.

Australians are significantly under superannuated, according to a 2016 MLC White Paper, many Australians believe they would not be able to fund their own retirement, with two in five (43%) agreeing that they would be relying on the Australian government[1]. Attacking superannuation in this way (to learn more about superannuation click here) does further damage to the confidence of Australians who want, and need, to put their faith in the system in order to self-fund and prepare for their retirement. This attack comes at a time when retirees need certainty in the superannuation system, especially as it is so soon after the sweeping changes that took effect on 1 July 2017.

What Is The Policy?

In 1987 Paul Keating created the dividend imputation scheme. It was introduced to do away with the government’s double taxation. Before the scheme was implemented, a company made a profit, paid tax and paid dividends to shareholders who then paid tax again. In effect the government was double dipping. In 2000 Treasurer Peter Costello expanded the dividend imputation system to enable taxpayers with excess imputation credits to receive a refund cheque from the ATO.

Bill Shorten’s proposal is to roll back this refund system. Currently, if a company paid its full tax rate, then there would be a tax credit attached to it called a franking credit. These are called fully franked dividends. This credit would then be passed onto the shareholder even if they have not paid tax in that year.

In simplistic terms for example, Jane is a shareholder of XYZ and earn $100,000 p.a. XYZ pays the top company tax rate of 30 percent. Jane has the marginal tax rate of 37%. If Jane receives a fully franked dividend then she pays 7 per cent on that dividend (37 minus 30 percent). In this instance, Jane doesn’t have any excess imputation credits.

However, if Jane only earned $35,000 a year she would pay marginal tax rate of 19 percent. Jane would then be entitled to claim a refund on the 11% difference (19 percent minus 30 percent).

Using another example, a superannuation fund pays 15 percent tax, if the company pays 30 per cent tax, then there is a high likelihood it might have some tax credits left over if it is heavily invested in Australian shares, like many SMSFs are. According to SMSF Association CEO John Maroney “many SMSFs in retirement phase have partly built their investment and income strategies around this policy.”[2] What Bill Shorten is proposing is to stop passing on the imputation credits to those who haven’t paid tax.

The table below illustrates how every superannuation fund and retiree is going to be worse off under this policy using a $1,000 dividend as an example.

*A Similar example applies to taxpayers who earn less than $18,200 per annum and less than $37,000 pa.

Who Does The Policy Affect?

Simply put everyone, especially retiree’s. According to the Australian Labor Party they say the policy will not apply to 92 percent of the 12.8 million Australians who lodge annual tax returns. But it does apply to 8 percent – more than a million taxpayers. However, this is too simplistic a view. Everyone’s superannuation returns will be affected, and it will hit all retirees with an account-based pension. Labor is also only looking at a superannuation fund as one tax payer, not the thousands of Australians that are invested in that fund.

The Federal Government is refuting Labor’s statistics, claiming it will impact around 40 per cent of all self-managed superannuation funds (SMSFs) and as many as 3.5 million superannuation fund accounts. Kelly O’Dwyer, the Minister for Revenue and Financial Services, commented the move represented a direct attack on retirees, pensioners and low-income earners and would mean dividends were no longer protected from double taxation. The minister also claimed that despite the Opposition’s suggestions that recipients of imputation credit refunds are “typically wealthier retirees”, the fact was that 97 per cent of individuals who received refunds of franking credits had taxable incomes below $87,000. More concerning is that over half of all individuals who receive refunds of franking credits have taxable income below $18,200, including pensioners, part-pensioners and self-funded retirees who have worked hard to support themselves during retirement. Labor’s policy would completely extinguish a vital income stream for these low-income earners[3].

How Does It Affect Me?

Everyone’s superannuation returns will be affected, and it will hit all retirees with an account-based pension and/or exposure to Australian shares. This is a tax on older Australians, many of whom are already on low-incomes. The drop-in income for these retirees will significantly affect their quality of life.

SMSF Association CEO John Maroney said the proposed changes would cut about $5000 of income from the median SMSF retiree earning about $50,000 a year in pension income. A retiree can live a moderately comfortable life on $50,000 a year, however a drop of $5,000 in income could mean the difference between maintaining a car or paying health insurance.

This policy is a double-edged sword; any revenue saved upfront will affect the government over the long term because it will make it harder for Australians to save for their retirement. More Australians will become reliant on the age pension. It may also impact the economy as Australian shares will become far less attractive and alternatives such international shares and property (including global property) will become more attractive consequently hurting Australian businesses.

What Should You Do?

Get financial advice to make sure your super is working for you. Remember this policy at the next election and make your voice heard. The attacks on our superannuation from our politicians must stop. Clawing back $59 billion from Australian retirees shows that the alternative government doesn’t have the political courage to address the country’s real issue of government over-spending. Government spending has been out of control since 2007 and both sides have done little to address the issue. Attacking the income and lifestyle of some of our lowest income earners is not good policy. If Australians, small business, and big business don’t have the confidence to invest or find it more attractive to invest overseas, Australia, its people, and its economy, will suffer greatly. Australia needs political leaders with the courage to make the tough choices, cut spending, encourage business to grow and invest, grow the economy, and most importantly provide jobs.

[1] 2016 MLC White Paper – Are We Worried About the Future (Part II)
[2] Labor’s excess dividend imputation credit policy unfairly targets SMSFs
[3] Labor’s retiree tax, Joint media release with The Hon Kelly O’Dwyer MP

The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.

Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.

Jose Hernandez

Jose Hernandez*

Jose Hernandez is a financial adviser. He believes that financial planning is the strong foundation on which Australians can build their future. Get in contact with Jose to discuss your financial goals 02 40381623.

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