With the government trying to drive the cost of superannuation down, Australians need to cut through the rhetoric and examine some of the ideas being considered by the government and opposition. These currently include the abolition of dividend imputation and reducing the tax concessions available within superannuation.
Evan Tsipas, Financial Advisor, RSM Bird Cameron Financial Services, said, “To counter the effects of an ageing population, low interest rates and conflicted financial advice, the government has taken some measures that should be applauded. Recent reforms have attempted to address the perceived high cost of both advice and financial products, especially as these costs relate to Australians who are not engaged with their super.
“Based on RSM Bird Cameron Financial Services’ analysis it appears that Australians may actually be worse off, on average, if the government removes the dividend imputation system even after recent reforms have taken effect.”
The removal of dividend imputation may have some positive and negative side effects for business and the economy.
Evan Tsipas said, “Upon removal, corporations are likely to slash dividends, which would be double-taxed and of less value to Australian investors. We could also see an increase in corporate debt issued designed to reduce tax as corporations can generally deduct interest.
“New debt issued by corporations could be used to embark on share buybacks, new investment and mergers and acquisitions. However from a macro perspective we need to consider whether more debt would increase systemic risk.
“The second- and third-order effects of the removal of dividend imputation need to be studied carefully. Encouraging companies to reduce dividends and increase leverage may put the Australian economy in a poor position to handle its next crisis.
“Opponents of the current system may argue it favours the wealthy who have a large exposure to Australian shares. It is true that wealthier Australians who own Australian shares will be more greatly impacted by the removal of the dividend imputation system.
“However, if the average Australian superannuation investor is tens of thousands of dollars worse off over a 30-year period upon removal of dividend imputation, they could experience a more meaningful drop in living standards, as compared to a wealthier individuals who can better cope with the elimination of franking credits. These new proposals are in direct conflict with the desired outcomes of recent reform”.
Source: RSM Bird Cameron
