The end of financial year will soon be upon us. But once you get past…
With an upcoming federal election Labor’s franking credit policy is becoming a hot election topic. When Bill Shorten first announced this policy back in 2018 I addressed how this policy would be a direct and unprecedented attack on all working Australians’ superannuation. However, it is also a direct attack on the thousands of retirees who rely on dividends, and their tax refunds, to live day to day. This policy will affect older Australians the most, low-income earners who may have some shares, and self-funded retirees including those who are members of SMSFs in the pension phase of their super.
What is the policy proposal?
Bill Shorten wants to remove cash refunds for excess franking credits. He proposes to end cash refunds on excess dividend imputation credits, garnering an estimated $59 billion over the next decade.
Want to know how franking credits work? Click: Franking Credits Explained
How will this affect retirees? Let’s use Bob and Beth as an example. 27 years ago, when Bob turned 40, he and his wife Beth decided to buy 1000 shares in the Commonwealth Bank (CBA) at $5.40 per share ($5,400). They have never sold the shares and have kept them because they wanted to put something away for retirement. Holding CBA shares for the last 27 years was a good decision and they have done well as a result.
After 40 years of working Bob and Beth are about to retire. They will be self-funded retirees, living off their superannuation funds and the CBA shares that they bought almost three decades ago. Under Bill Shortens Franking Credits policy Bob and Beth will be worse off by $1,292 per annum, a 30% difference in income from their shares. However, to make the same amount of money back on the remaining funds they would need to a tax-free return of 42.9% which is improbable if not impossible for them.
|CURRENT||LABOR PARTY PROPOSAL|
|CBA Shares Yield (%)||6.03%|
|Franking Credit (Paid to ATO by the CBA)||$1,292||$1,292|
|Total Income from Shares||$4,307||$3,015|
|Difference ($)||$1,292 / 30% worse off|
|Rate of Return Required to Offset loss||42.9%|
This policy also has the potential to affect Bob and Beth’s super as their rate of return could drop. Pension funds rely heavily of franking credit rebates, so Bob could in fact be even more worse off. I addressed how this policy would affect all working Australians’ superannuation back in 2018 in ‘Bill Shorten’s Attack on Your Superannuation’.
Why This Is A Bad Policy For All Australians
It attacks low income retirees, not the rich
Bill Shorten has said that he would like to implement this policy to stop millionaire retirees that have their money in superfunds from getting huge tax refunds. In their fact sheet, Labor has cited that of all excess imputation credits refunded to SMSFs, 50% of the total benefits go to the wealthiest 10% SMSF balances (which have balances in excess of $2.4 million). However, legislation took effect from 1 July 2017 which capped the amount transferred to a pension account at $1.6million per person which effectively stops this being an issue as Australians can no longer have uncapped amounts in pension accounts. Millionaire retirees may now have a substantial portion of their money outside of superannuation or in superannuation accumulation phase which means they (or their super fund ) are likely now to pay tax and will be able to use the tax they pay to claim the franking credits, either in full or part.
Labor are mistaken that this policy hits the rich. 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. Labor’s policy would completely extinguish a vital income stream for these low-income earners.It is those retirees who just miss out on the Age Pension who will be most badly hit, because they will lose the cash refunds without any compensation. And there are one million of them. Liberal MP Tim Wilson has said “there’s a material impact on their quality of life as a result of a change of law. What we’ve heard across the country is people will lose 20-30 per cent of their income regardless of who they are.”
Labor, sensing the unpopularity of this policy, has announced the Pensions Guarantee. Whereby every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds and Self-managed Superannuation Funds with at least one pensioner or allowance recipient. However, the concession for SMSFs with at least one member who is a pension or allowance recipient depends on the date you registered for the pension or allowance. Why would Labor think that exempting SMSFs with at least one Age pensioner before 28 March 2018 from the cancellation of cash refunds makes any sense? If you have signed up to the Age Pension after this date your SMSF will be treated differently from the SMSF of your friend down the street in the same income and asset position. How is that fair? And how will it be monitored?
More Will Claim The Age Pension
This is another example of government changing the goal posts on hard working Australians who do the “right thing” and save for their retirement. Federal Treasurer Josh Frydenberg said “people who have taken personal responsibility for Australians’ retirement savings should be protected, not raided, as Labor is promising to do.” The notion that the elimination of cash refunds will “save” $59 billion over the next decade should be treated skeptically. Many retirees may need to rearrange their affairs to qualify for the Age Pension to support their lost imputation income, which will offset any savings for the government. Millions of Australians have designed their retirement plan around the current franking credit policy. Not only those who have already retired, but those Australians who are in the pre-retirement phase have been building their investment and superannuation portfolios, which would be heavily invested in Australian shares, working within the current regulations. This policy will see more retired Australians claim the aged pension.
Contractionary Effect On The Economy
One million Australians with less income will have a knock-on effect of reduced consumption which will in turn affect the economy. Most retirees live on tight budgets and any loss of income hurts. Less income means less discretionary spending on things such as a coffee and cake at the local cafe, domestic travel, haircuts and health care. Pensioners support local businesses as they are less likely to buy online and instead shop locally. This could lead to a contractionary effect on the economy.
Australian Stock Market Could Fall
Australians have had a strong bias towards investing in Australian shares due to the existing franking credit policy. This preference will most likely dissipate as investors and superfunds will instead look to invest in overseas stock markets with more favourable conditions.
It Will Affect All Australians’ Superannuation – Not Just Those Who Own Direct Shares
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. It has the potential to impact all superannuation funds invested in Australian shares. Superannuation returns could be affected, and it therefore could 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.
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