Franking-credit plan soaks more than rich, critics say

Andrew Main

By

November 2, 2018

It’s always interesting to watch an irresistible force meet an immovable object, and in this case it’s a big cohort of anxious SMSF members, and their champions, locking horns with shadow treasurer Chris Bowen.

Bowen has made it clear he’s not for turning on his plan to abolish tax refunds for franked dividend recipients with low or no taxable income. He says such an abolition could raise between $5 billion and $6 billion a year.

What’s more, most experts believe the ALP has a very good chance of winning the next federal election, which must be held between now and May next year.

So his proposal has caused the creation of a major assembly of retirement umbrella organisations calling themselves the Alliance for a Fairer Superannuation System. The AFSS represents about 11 groups, most notably the SMSF Association.

The alliance held a standing room-only event in Sydney last week to rally the faithful. Conference organisers noted that no ALP figure had accepted an invitation to attend.

28 per cent less income

Some retirees could theoretically suffer a 28 per cent drop in their income, the conference was told, as a consequence of abolition.

That number comes from Dr Don Hamson, managing director of Plato Investment Management and a specialist in retirement strategy, who admitted that was a “worst-case scenario” for a saver with all their super assets sitting in equities that pay franked dividends.

Professor Geoff Warren, from Australian National University, who recently undertook research on behalf of Treasury into possible effects of abolishing those tax refunds, told the audience he had concluded that it would be an inefficient way of raising tax revenue.

“That’s because it carves out a certain class of retiree,” Warren said, referring to the group of savers who have personal superannuation accounts worth between $500,000 and $1.6 million. The latter number is the maximum value that a person can now hold in a super account, above which it becomes liable for taxation and, therefore, franked dividend refunds

He indicated that below the $500,000 level, fund members would probably qualify for at least a partial age pension and above that $1.6 million cutoff they would be likely to have parked assets outside their tax-free superannuation, and thus would have enough taxable income to claim the full franking credits their super account provided.

Warren also noted that because of the mix of rules and thresholds in current superannuation regulations, it was quite likely that some super account holders would find themselves dipping in and out of the right to collect tax refunds from their franking credits.

“It’s a bit of a dog’s breakfast of a policy,” he said. “They should find a better way of taxing the rich.”

More than the wealthy affected

Professor Deborah Ralston of Monash University, who chairs the AFSS, made it clear that the planned abolition of refunds would have a wider effect than most people realised, across more than just a fixed group of self-managed superannuation fund trustees.

Ralston said well over 1 million older Australians, including more than one-third of Australia’s 3.6 million self-funding retirees, would be affected by the proposal.

“Those are Treasury figures, not things we have made up,” she added

Ralston broke it down. There are about 850,000 self-funded retirees who do not receive the age pension exemption but do receive an annual credit refund of about $5000; meanwhile, there are about 370,000 SMSF member accounts that would be affected, with a median franking credit refund of $5100 and an average refund of about $11,000.

The age pension exemption was devised by the ALP to soften the blow of abolition, leaving untouched the tax refunds of anyone in receipt of the age pension.

Ralston noted that it wouldn’t merely be SMSF investors who will be affected but also members of some conventional pooled super funds.

“It’s also estimated that there are between 40 and 50 large – and almost 2000 small – [Australian Prudential Regulatory Authority]-regulated superannuation funds that will be affected, impacting between 2.6 million and 3.5 million members.”

That’s where the debate starts getting away from any narrative about “soak the rich”, which has been a cornerstone of Bowen’s push to abolish the refunds.

An impact beyond SMSFs

Hamson told the meeting that as members of the APRA-regulated funds aged, their pooled super funds would also run the risk of not paying enough tax on behalf of members in the accumulation phase to be able to exploit the full tax benefits of franking credits, if the ALP proposal became law. He said most, but not all, of the funds in that situation would be industry funds, which tend to have younger members.

“AustralianSuper has told members they will get the full value of franking credits,” he noted, adding that members of other funds might not be so fortunate.

Hamson said the ALP proposal would create a massive incentive for people with less than $800,000 in retirement assets to spend their money and then take up the age pension.

“The maximum pain will be when you just miss out on the pension,” he said, noting there was a lot of misunderstanding out there among supporters of the ALP proposal in terms of who was considered “rich’’

“Those who can least afford it are the ones who are going to be worst off,” he said, reaffirming Warren’s line that the impact would hit the lower levels of self-funded retirees the hardest.

Hamson noted, however, that he was not convinced such a measure would pass through the Senate even if the ALP were in government. He said a number of cross-bench senators had already indicated reservations about abolishing refunds.

Wilson Asset Management’s Geoff Wilson, who has been leading a revolt against the ALP policy, said one of the party’s explanations for the policy was that Australia was the only country in the world that provides such refunds.

His counter-argument is that, thanks partly to the existence of dividend imputation, Australia is also the only country in the world not to have had a recession in the last 26 years.

But his main focus was on the possible plight of elderly self-funded retirees who had included the tax refunds in their income plans and were now contemplating reduced income levels as a consequence of the policy.

He said he now had more than 25,000 signatures on a petition he planned to present to senior ALP figures, as part of a survey his organisation had done of member attitudes.

“We found that 70 per cent of the respondents earn less than $90,000 a year,” Wilson said.

Speaking after the event, he said a number of cross-bench senators he had approached were sympathetic to the anti-abolition movement’s goals.

“I understand that the tax contribution of older Australians has dropped below where it was, in percentage terms, but I don’t think this is the way to correct that,” Wilson explained.

Plus, he said, nothing is going to happen any time soon.

“Even if the ALP is elected in May, they won’t be able to get this measure through by June 30, so the earliest this measure would take effect, if it did pass, would be 2020.”


TOPICS:   Alliance for a Fairer Superannuation System,  Chris Bowen,  Deborah Ralston,  Don Hamson,  Geoff Wilson,  smsf

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