Franking: never mind the logic, let’s obfuscate

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Last week’s Cuffelinks piece by Warren Bird gave an excellent and logical refutation of the Labor Party proposal to eliminate refunds to taxpayers of unused franking credits.

However my belief is that this proposal will not be defeated by logic alone. Imagine a talkback shock jock demanding why a wealthy retiree earning $70,000 in dividends each year can be given a free kick of $30,000, no questions asked, when a poor old age pensioner has to survive on a maximum pension of less than $20,000, and then only after surviving Centrelink grilling. The shock jock’s listeners would enthusiastically and indignantly accept the statement at face value and would not be interested in reading lengthy, detailed explanations.

How a discussion goes off the logical path

That this battle will be fought on ideology grounds with other issues brought into play rather than logic was made clear on ABC’s 7.30 on Wednesday 21 March 2018 when the Grattan Institute’s CEO, John Daley, was interviewed (starts at 24:20).

The interviewer, Leigh Sales, introduced the segment by saying that the Grattan Institute had been crunching the numbers, implying that viewers could expect to hear an objective assessment of the Labor proposal. And indeed, in the past, the Grattan Institute has done good work in relation to superannuation issues, for example its 2014 landmark report on the impact of fees on retirement incomes.

The interview started well enough, and John Daley’s responses to the first questions can be paraphrased thus:

Most of the money raised will come from people who have substantial assets other than their home.

Retirees often have low taxable incomes but high untaxable incomes because superannuation earnings are not taxed.

So far, perfectly reasonable. Then (at 27.50), Leigh Sales notes that individuals make long-term financial decisions on the basis that franking credits will continue to be refunded, and then the rules change after they are already in the retirement phase. John Daley responds:

“That’s true but it’s true for all of us. If I buy BHP shares and governments change the tax rates, I pay more tax. There it is. The idea that somehow, once you’re retired, the government is not allowed to change any of the tax rates (when they can change them for the rest of the population) does seem a little odd.”

You be the judge. For me, instead of responding to the question on the fairness of not refunding franking credits, John Daley defended any government’s right to change tax rates as it sees fit. Of course governments can change tax rates, but tax rates were irrelevant to the question asked.

John Daley raised another subject and perhaps his partisanship on the franking debate. I previously held the Grattan Institute to be objective on issues.

How might a hypothetical interview unfold?

A line of questioning might have continued along the following track, the responses to which are purely my own invention in trying to play the devil’s advocate (I’m not suggesting John Daley would head in this direction, but illustrating how difficult it is to have a logical discussion on this subject):

Question: But the ALP isn’t proposing any change in tax rates, is it? Its proposal is all about refunds. If two SMSFs each have income of $100,000 a year, with the first’s income being entirely real estate rents while the other’s income comprises share dividends and refunded franking credits, what’s fair about one being unscathed while the other loses $30,000?

Answer: Quite straightforward – the income of the share dividend SMSF includes a $30,000 concession refunded from Australian taxpayers.

Question: But is it fair to call the refund a concession? And how does a franking credit refund differ from an employee receiving a PAYG refund after putting a tax return in at the end of the year? There’s no Labor proposal to abolish PAYG refunds for ordinary taxpayers.

Answer: Again straightforward – the refund that a PAYG taxpayer receives is their own money that has been collected during the year, not a concession financed from taxpayers.

Question: But isn’t that also the case with franking credits, which are sourced not from taxpayers in general but from the tax that has been collected from the specific companies that shareholders are invested in?

Answer: And that’s the critical difference – that the tax has been collected from the companies, not from the shareholders. So it is not the shareholders’ money in the first place.

Question: Are you saying a company’s money belongs to other than its shareholders’? In fact, the word ‘company’ is simply the collective noun for shareholders, just as in a company of soldiers.

Answer: Er … I’m sorry, but I have another pressing commitment that I must leave for now.

Question: Well, just before you go, is it equitable that the SMSF pensioner we talked about earlier could simply roll over the SMSF’s share assets into a pooled superannuation fund, perhaps an industry fund, and continue to collect the franking credits refund, on account of the pooled fund having ample taxable income to absorb the franking credits.

Answer: As I said, I must rush. Goodbye.

 

Geoff Walker is a former Chief Actuary at the State Bank of New South Wales and winner of the 1989 JASSA Prize for published research on the implications of the then relatively-new dividend imputation system.

The Grattan Institute’s position on Labor’s policy is here in The Conversation.

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59 Responses to Franking: never mind the logic, let’s obfuscate

  1. Nic Chaplin November 7, 2018 at 9:09 AM #

    What seems astounding to me regardless of whether you accept this whole thing as just a political play for ideology reasons to get votes, is that there is no dollar benefit to the government if they do rescind cash rebates. The credits not used by one will be claimed by another that can use them as the securities change hands. More needs to be made of this obvious outcome of nothingness for Labor really.

  2. Laine April 16, 2018 at 3:28 PM #

    If these changes do actually become law in the form proposed, and you don’t have a govt pension, it may be worth looking at having a company structure for your investments rather than leaving them in super.

    If your money is in pension mode super you will lose all the franking completely at the end of each year.

    But if your money was in a company you would retain the franking paid to you in your company’s franking account and this would carry forward each year along with the benefit of any tax your company pays.

    Any unfranked income or capital gain could be paid out to the directors in salary or fees, and this would be a tax deduction for the company. You could also pay out some franked dividend and work out a balance between salary and dividend so the franking you received from your company covered the personal income tax you owed on your total income.

    You would have complete discretion over how much you were paid by your company, so you could still qualify for a seniors’ concession card (calculated on your taxable income).

    You still don’t get back the cash refund for the franking credits, but at least they would stay in the company and may be useful at some later date. Even if you never use them you are still no worse off than having the money in super.

    There would be no worries about minimum income streams, tax on your super when you died or even death benefit beneficiary forms. The company would simply form part of your estate. You could also add more capital to the company when you wanted or take capital out.

    Probably worth crunching the numbers.

  3. Avery Andrews April 6, 2018 at 12:11 AM #

    One uncertainty I see with Labour’s plan is that superficially at least, the people affected would be those with only franked dividend shares and nothing else such as income from an investment property to apply the credit to, but maybe shares would have been a better investment from the beginning, even without the imputation. Property investors do pay a lot in taxes.

  4. Roger Smith April 5, 2018 at 1:04 PM #

    I don’t pretend to fully understand this issue but from what has been explained it seems that the company has already paid the tax on the dividend so the person receiving the dividend is not taxed twice they may be eligible for a tax refund. Since they have structured their affairs so it appears their income is below the tax free threshold they get a refund but they are not being taxed twice. Sometimes largesse handed out by governments who are buying votes have to be wound back by another. I am retired, I am a self funded retiree who receives no govt benefits and I see no reason those who have retired should be exempt. If belt tightening and getting people off welfare has to be inflicted on the poor then everyone else should do their bit.

  5. Graham Hand April 5, 2018 at 12:28 PM #

    Hi Tim

    The short(ish) answer is:

    1. Remember that Labor is not eliminating franking credits totally, but rather removing refunds for some people (not age or disability pensioners) who have excess franking credits. Therefore, many SMSFs will continue to receive the full benefits of franking, because their assets produce income other than franked dividends. For example, my own SMSF holds listed property, unlisted bonds and other assets which pay taxable income, and I will be able to use the franking credits from dividends to offset the tax. So depends on your circumstances.

    2. For the same reason, pooled funds like industry funds are not worried about the changes because within the taxable entity, there is other income against which the credits can be used.

    3. There are many other reasons to use an SMSF, such as the ability to buy assets which are not included in any public fund. This is the case for me as I invest in many unlisted assets.

    In summary, whether it’s worth retaining your SMSF will depend on your circumstances.

    (And I stress, Cuffelinks is not licensed to give personal advice).

    Cheers, Graham

    • Tim April 5, 2018 at 1:27 PM #

      Thanks Graham. I understand your answer, especially that the impact of the proposed policy is case-dependent.

      My situation is that my assessable income (outside Super) is just less than $20,000 and being in pension phase means I am currently able to claim all the franking credits garnered through my SMSF investments as a cash tax refund. These include share and LIC franked dividends and (presumably) FRN coupons which include a franking credit component.

      My SMSF has a small proportion in assets which I believe are “listed property” (such as WFD/SCG) but I don’t understand how those affect my SMSF tax rebate situation. While too small to have any meaningful impact, it would still be informative to understand the tax situation of different asset classes a SMSF might hold and their impact on the franking credit proposal. It might then be possible for affected individuals to develop a strategy to alter their SMSF asset mix should the proposal eventuate.

      I am also unaware of the mix of assets that pooled funds hold which produce taxable income. For instance, would a pooled fund Balanced option typically hold sufficient assets producing taxable income to enable full use of all franking credits ? If so, doesn’t it seem even more extraordinary that a political party would single out such a small subset of the population to penalise ? If a SMSF is established to enable individually-selectable investments but does not seek any other allowable SMSF-specific investment activities (e.g. owned business premises, real estate, artefacts etc.), it would seem a natural strategy to rollover to a pooled fund and abandon the SMSF. I think that would be useful information for the small subset of affected people.

  6. Tim April 5, 2018 at 12:01 PM #

    Thanks for your newsletter which I find the most informative of all those I receive. Due to my interest and investments in LICs, I really appreciate the articles on that subject plus the regular links to LIC-universe update reports.

    On the subject of Labor policy to disallow cash refunds of franking credits, there have been several articles that deal with the detrimental impact specifically on SMSF’s and, in the latest newsletter, the disadvantage dealt to LICs. As someone who currently benefits significantly from the current policy, I wonder what my strategy should be were Labor to successfully implement their discriminatory policy. I have seen no discussion of the impact this policy would have on public subscription Super Funds e.g. industry funds such as those my wife has her super invested in. Perhaps your newsletter could explain how public subscription Super Funds would be impacted differently to SMSFs under the proposed labor policy. If the former are unaffected, why wouldn’t any current SMSF owner simply close it and rollover into a public subscription Super fund ?

  7. Mr.Auspicious April 2, 2018 at 4:29 PM #

    Couldn’t agree more Trevor – and who can we thank for such a debacle???

    The country is over governed and the time is long overdue for meaningful constitutional
    reform to haul the country into the twenty first century.

    State governments are a relic of the horse and buggy era and have far outlived their
    usefulness. The country would benefit from their immediate abolition and the elimination
    of much bureaucratic duplication.

    The dysfunctional federal senate is another candidate for massive reform. Originally
    intended as a house of review it now does little more than obstruct policy making
    initiatives mandated to a representative elected government.

    It’s the stuff of farce but unfortunately the joke is on the taxpaying electorate who are
    obliged to fund this fiasco.

  8. Trevor Burndred April 2, 2018 at 4:11 PM #

    This only confirms that the whole system is too complex for most to understand.

  9. Brian Bycroft April 2, 2018 at 10:03 AM #

    The only way for the comparison with PAYG to be valid would be if Government made dividend payment exempt from Company tax, with the tax payable totally determined by the individual’s circumstances. As a by-product this would totally remove the need for franking credits and associated bureaucratic processes. The fact that this wasn’t done clearly indicates this was not the intent of the policy. Labor’s approach (ignoring recent backflips) makes perfect sense.

  10. Michael Dwyer April 1, 2018 at 4:44 PM #

    The PAYG taxpayer has already paid tax on his earnings. The refund is for overpaid tax, as a result of allowable deductions. The pensioner is likely to be living on a fund built up through tax concessions. As he pays no tax anyway, he cannot be compared with the PAYG worker.

    • Jan H August 16, 2018 at 3:19 PM #

      Graham: I have just phoned Shorten’s office and you are absolutely correct: All Govt pensioners past and future will receive cash refunds. The person I spoke to says SMSF retrirees receiving a pension from their funds are NOT PENSIONERS.

  11. DR April 1, 2018 at 8:59 AM #

    It just dawned on me where the confusion is …
    ” the SMSF has a member receiving a pension” == meaning someone who is getting a full or part pension from the Fed Govt ?

    Myself (and probably others) think of self funded retirees receiving a pension from their SMSF as “pensioners” – but this is wrong I suspect ?

    • Jan H August 16, 2018 at 12:05 PM #

      Yes, DR, you are correct. Labor has quarantined retirees receiving a Government Aged or Part-Aged pension as of 28 March 2018. A retiree with an SMSF who is ALSO receiving a Govt Pension as at 28 March is also quarantined. Both will continue to receive cash refunds.

      But, here’s where the inequity comes in: Future Govt pensioners and SMSF pensioners (including those in pension mode at 28 March WILL NOT receive cash refunds.

      So Bill Shorten’s claim that pensioners always do better under Labor is simply A LIE. Labor’s plan creates two classes of pensioners: Bill’s CHOSEN ONES and all the rest!

      • Graham Hand August 16, 2018 at 12:09 PM #

        Hi Jan, that’s not my understanding. The 28 March date applies only to SMSFs. Labor will allow refunds for future welfare pensioners.

        Labor’s policy says: “The Pensioner Guarantee means pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.

        Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

        This means that every pensioner will still be able to benefit from cash refunds.”

  12. Graham Hand April 1, 2018 at 8:58 AM #

    Hi DR

    Yes, if the SMSF has a member receiving a pension (age or disability), the SMSF will receive a refund of franking credits. Labor estimates there are 13,000 of them. I heard some advisers were looking to add a pensioner member to client SMSFs on 28 March for this purpose. G

  13. DR April 1, 2018 at 8:56 AM #

    Great article by Geoff Walker, but I am confused by one statement he makes – namely:
    ” SMSFs in pension mode pay zero tax on income or capital gain so they are clearly the target on the policy (although SMSFs with at least one pensioner member as at 28 March 2018 will also be exempt).”
    ….exempt from what ? …does he mean that in addition to the recent back-peddle that labour did for full or part pensioners re full refund of franking credits, that in addition now, people that have an SMSF and are receiving a pension from it (i.e. are in pension mode) will get full refund of franking credits ? …i.e.another back-peddle ?

  14. James March 31, 2018 at 10:44 AM #

    Ben. I’d be happy to pay tax on my super pension, if I hadn’t already paid tax on the way in and on the earnings too. Governments keep changing the “contract” eroding confidence in the value or even the point of contributing 1 extra cent to superannuation over what is compulsory.

    Most other countries only tax the superannuation pension, letting people build a nest egg and hopefully be self sufficient. Successive Australian governments seem intent in making this task impossible. Merely kicking the can down the road, ever closer to a real disaster further down track. Wake up Australia. The pension will be unaffordable in the future!!

    The bigger issue here is that insufficient tax is being collected to fund commitments that we can’t afford and implementation of the much needed total overhaul of the tax system, as recommended by the Henry review, is political suicide!

    Also, far too many Australians expect government to pay for a lifestyle and standard of living that they personally don’t want to pay for. Better the “weathly” are targeted more, despite the inconvenient truth that the top 20% or so of taxpayers already pay about 80% of the tax and 50% of the workforce effectively pay no net tax.

    Like in a family, it’s about time government had an adult conversation with the Australian people, explaining what needs to change, if as a country we are to have a bright and prosperous future with an improving standard of living for all.
    It means we must all pay our way and have realistic expectations. Political parties need to make changes to achieve this and stop using class ware fare and the politics of envy and stop the short term thinking and making stupid promises to get elected or to stay in power.

  15. Jack March 29, 2018 at 9:16 PM #

    Case A: If a regular taxpayer’s only income was dividends from fully franked Australian shares, they can earn $94,500 in dividends and pay minimal additional tax, because the franking credits almost completely pays for the tax liability. The taxable income is $135,000 which is comprised of $94,500 dividend (70%) in addition to $40,500 franking credit (30%). The tax on that taxable income is $40,597. The shareholder’s tax liability is only $97 on a dividend income of $94,500 because the tax payable is almost completely covered by the franking credit paid in advance by the company to the ATO on behalf of the shareholder. The tax credit is as good as cash to pay the tax liability. Where is the outrage that this taxpayer can have all that income and pay only minimal additional tax?

    Case B: Assume the taxpayer is a super pension fund with the same dividend income. The taxable income remains $135,000 but the tax payable in a super pension fund has always been zero. This has always been so to allow super pension funds to pay retirement benefits for longer. If that was not the case, super balances would be depleted faster and retirees would be become dependent on the age pension sooner and for longer.

    Therefore the super fund would receive $94,500 directly as dividends and a tax refund of $40,500 for the excess tax already paid on its behalf. The after-tax income is $135,000 or 42% higher than the dividend alone. This demonstrates the attraction of owning fully franked Australian shares in a super pension fund. It might also explain why many Australian super pension funds have a higher asset allocation to equities than their international peers.

    If Labor adopts the policy of denying a cash refund for excess franking credits, then the taxpayer in Case B (typically a SMSF) is in exactly the same tax position as the taxpayer in Case A. Both taxpayers have a taxable income of $135,000 and both have $94,500 after-tax because both taxpayers have paid $40,500 in tax which is an effective tax rate of 30% on their taxable income. Excess franking credits that currently are refunded as cash would then be confiscated. Franking credits are still as good as cash, but only to some favoured sons and daughters in some favoured super funds. That is where the outrage should be.

    • Allan March 30, 2018 at 1:14 AM #

      Case C: Post implementation of Labor’s franking credit proposal, a university student member of a young couple (not a pensioner) trying to save for an increasingly elusive house deposit, receives $200 dollars in fully franked dividends from a modest shareholding which has tax deducted at 30% by the company. As the young shareholder is no longer given the opportunity to have this income assessed as part of their overall tax liability, they incur an effective marginal tax rate of 30% flat.

      This is similar to the average tax rate paid by a taxpayer on the top marginal tax rate earning over $180000 a year.

      Perhaps only a small percentage of the population, but who of us can know how many people are in circumstances which will leave them unfairly impacted by Labor’s politically driven proposal.

      In playing politics, Mr Shorten and Mr Bowen have elected not to tackle the real issue of ensuring fair and equitable tax rates are paid at the individual level.

      • Ben March 30, 2018 at 5:52 PM #

        Allan, I am interested to know what you think a “fair and equitable tax rate” might be for retirees. Is it equitable to not pay tax for up to 50% of your lifespan (say, 20 years in your youth plus 25 years in retirement)? To be fair, most of us should live long enough to get a crack at this great arrangement.

  16. Alan Lobley March 29, 2018 at 7:40 PM #

    An issue of ‘Aussie fairness’ arises with this stupid attempt to gain more tax. I am a SMSF retiree who has paid payee tax for 49 years. I originally joined a managed superannuation fund but was ‘screwed over’ – not at liberty to say how/why. Sufficient t say I was being mislead and ripped off.
    As a strictly taxation ideal I would submit that although I no longer work, I have an income from my superannuation in the $40,000 t $45,000 range.
    If ‘all income streams’ are to be taxed according to the taxation rules (same rules for all!??!!) then I a entitled to earn $18,000 without paying any tax – the same as other people with incomes. Then I pay the marginal rates of tax up to my income value and then be able to claim any cost related to the generation of this income, as a tax deduction.
    The greater the SMSF value the greater the tax liability but also the potential of tax deductions – the rich always get the largest benefits.
    According to taxation rules then I am entitled to use the franking credits to offset against my taxation liability. Those with the largest values would (hopefully) have the largest taxation liability but also have the largest franking credit refund.
    I would rather see the system stay the same BUT at least all residents of Australia would be subject to the same taxation regime – the is MUCH FAIRER than cancelling my franking credits in total.
    If this happened I would be paying 42,7% tax on my dividends, no mater what income level I have.
    If I am to lose 30% of my income, then I would also like all politicians to lose 30 of their incomes and all tax payer funded ‘perks’ (travel, not paying into super, being able to access super before 65 years of age, etc, etc.
    LETS BE FAIR IF YO CAN TAKE IT OFF ME then I SHOULD BE ABLE TO TAKE IT OFF YOU. After all you work for the tax payer – we all know you don’t so why should we pay for you????,

  17. Honest Joe March 29, 2018 at 7:16 PM #

    Well said Geoff!!

  18. Honest Joe March 29, 2018 at 7:00 PM #

    The refund reflects corporate tax and should never have been refunded to individual shareholders as they did not pay it. The proposal is fair and ethical.

    • Allan March 30, 2018 at 12:40 AM #

      The proposal is neither fair nor equitable as it disadvantages certain people on genuinely low incomes by the imposition of a 30% flat tax rate on their earnings from fully franked dividends.

      Tax is ultimately paid at the personal level, therefore the individual shareholders have in fact had it paid on their behalf in advance, until their complete EOFY tax liability has been assessed. At that point, as for every other tax payer in every other circumstance, they are entitled to a refund of the excess tax liability incurred. Same for a part owner of a business (shareholder) as for the sole owner of a business.

      This principle is in fact still acknowledged by Labor in that taxpayers earning above $37000 in the financial year receive the full 30% value of the deducted company tax as a reduction in their marginal tax rate.

      The problem which remains unaddressed by this proposal is the suitability and fairness of the personal tax rates applied at various ages and stages of life.

    • Rob March 30, 2018 at 9:45 AM #

      You people just don’t understand basic tax principles – income is taxed (ultimately) in the hands of the final beneficiary. Duh!

      If the issue really is tax on super pensions, then fix that, don’t distort everything else at the margins because that just creates the mess that is currently proposed.

  19. Philip - Perth March 29, 2018 at 6:19 PM #

    Everyone should stop wetting their pants and get over this. There IS a BIG difference between an employee who has an employer pay tax on their behalf (at an estimated rate) and the employee later getting a refund when their tax rate is lower, and a shareholder and the refund of company tax paid at the standard rate. One gets tax back that’s owed to them by the ATO whereas the shareholder is a different entity to the company and is not entitled to any presumption as to what’s “owed”. AND the shareholder does not share any liability of the company (that’s what “limited liability” means and is why the company exists – to separate shareholders from the business and control of the company). So, they are about as alike as cows and seagulls (both are animals, but quite different) and can and should be treated differently. This proposal by Labor is long overdue and is a fairer treatment than the over-the-top generosity of the Howard/Costello nil tax on pensions and refund of company tax to (often wealthy) individuals who don’t pa tax on their income. The only mistake is removing the provision from Age Pensioners; it should simply have been capped at $1000pa max refund.

    • Allan March 30, 2018 at 12:30 AM #

      As an owner of a business in its entirety, irrespective of the structure used, including a company structure with me as the sole shareholder, all of my income is ultimately assessed at a personal level, taking into account all other relevant income and deductions.
      The franking credits arrangements as they stand ensure that part owners of a business, shareholders, are treated in the same manner.

      The business structure is irrelevant to the ultimate tax liability at the personal level. This is entirely appropriate to ensure that excess tax is not paid, as it is to prevent too little being paid.

      As you allude to, the actual problem still not being addressed is the suitability of the tax rates.

  20. David Street March 29, 2018 at 6:05 PM #

    John V you are so right and there are many (including myself) in the same position. I wrote to my local ALP MP and received a polite reply quoting the ALP position. When I replied that I was disappointed. I got SILENCE

  21. John V March 29, 2018 at 5:08 PM #

    I have SMSF which receives franking credits of between $10,000 and $16,000. If these are abolished then the longevity of the fund will reduce meaning that I will possibly have to revert the aged pension, which I tried so hard in my working life to avoid by being frugal and saving for my retirement. I see no advantage in rolling over to an industry fund (fees are too high) and will be forced to take a more active role in investing for growth and no dividends. Alternatively, I could wind up the SMSF and continue investing in personal names – I would save $3,000 p.a. in accounting fees and $300 in regulatory fees but would receive the franking credits. Additionally, I would not have to put up with the political football that seems to engulf the political system and would regain control of my finances – a major factor that led me to set up my SMSF in the first place.

    • Honest Joe March 29, 2018 at 7:11 PM #

      If you are receiving that much in refunds you are very well off, with millions on super. Your money will see you out if you’re not too profligate.

    • Mr.Auspicious April 2, 2018 at 4:12 PM #

      I’m in a similar situation, to you, John V, having established a smsf which has adopted a strategy of investing for income. The strategy was relatively simple to execute and prior
      to amended regulations capping tax free status of member’s funds at $1.6 million, I had
      almost full discretionary control over my financial future.

      The smsf goalposts have already been shifted irrevocably and this will impact detrimentally on a significant number of smsf retirees, whose funds are in retirement phase. Now Shorten’s proposed abolition of franking credit refunds has potential to finish the task started by the Liberal party.

      The economy is still reeling from Labor’s incompetence when last in government. There
      is the debacle of white elephant infrastructure ( NBN, BER etc.) not to mention profligate social welfare initiatives.
      Now there the real prospect of having to deal with another policy that will inhibit aspirations of those seeking a fully self funded retirement free from an increasingly intrusive “nanny state”.

  22. Wayne March 29, 2018 at 4:02 PM #

    Owning a share in a company (equity) , the shareholder takes on the risk of losing 100% of original capital. Profit or loss is subject to the quality and performance of the company. The shareholder is entitled to that part of the equity purchased (+ or -) including the attributed (imputed) tax allotted (paid) by that share.
    Under Labour law this only applies if you have a MTR greater than zero e.g. 30 cents in the dollar. No logic at all.

    As for Gen Y comments, the penny has not dropped, such law disadvantages future generations both on the intergeneration transfer front and when their retirement day arrives.

  23. Leigh March 29, 2018 at 3:08 PM #

    Sorry Graham, not quite.

    This will attack more than SMSF trustees/ beneficiaries and it will impact more than Centrelink pensioners – and for the benefit of the ALP supporters, even those with low wealth and low income. The ALP proposal is unfair and is poorly targeted – most likely because of ideology.

    If the retirement incomes policy is in need of a rethink then, whichever party is in power, will need to look at it in its entirety.

  24. Jon Kalkman March 29, 2018 at 2:30 PM #

    Case A: If a regular taxpayer’s only income was dividends from fully franked Australian shares, they can earn $94,500 in dividends and pay minimal additional tax, because the franking credits almost completely pays for the tax liability. The taxable income is $135,000 which is comprised of $94,500 dividend (70%) in addition to $40,500 franking credit (30%). The tax on that taxable income is $40,597. The shareholder’s tax liability is only $97 on a dividend income of $94,500 because the tax payable is almost completely covered by the franking credit paid in advance by the company to the ATO on behalf of the shareholder. The tax credit is as good as cash to pay the tax liability. Where is the outrage that this taxpayer can have all that income and pay only minimal additional tax?

    Case B: Assume the taxpayer is a super pension fund with the same dividend income. The taxable income remains $135,000 but the tax payable in a super pension fund has always been zero. This has always been so to allow super pension funds to pay retirement benefits for longer. If that was not the case, super balances would be depleted faster and retirees would be become dependent on the age pension sooner and for longer.

    Therefore the super fund would receive $94,500 directly as dividends and a tax refund of $40,500 for the excess tax already paid on its behalf. The after-tax income is $135,000 or 42% higher than the dividend alone. This demonstrates the attraction of owning fully franked Australian shares in a super pension fund. It might also explain why many Australian super pension funds have a higher asset allocation to equities than their international peers.

    If Labor adopts the policy of denying a cash refund for excess franking credits, then the taxpayer in Case B (typically a SMSF) is in exactly the same tax position as the taxpayer in Case A. Both taxpayers have a taxable income of $135,000 and both have $94,500 after-tax because both taxpayers have paid $40,500 in tax which is an effective tax rate of 30% on their taxable income. Excess franking credits that currently are refunded as cash would then be confiscated. Franking credits are still as good as cash, but only to some favoured sons and daughters in some favoured super funds. That is where the outrage should be.

  25. David Michael Miller March 29, 2018 at 2:30 PM #

    It’s an attack on people who have an SMSF. Everyone else gets a franking credit.

    • Ben March 29, 2018 at 3:35 PM #

      Everyone gets franking credits. What is disputed is whether these should send your tax payable negative, resulting in a payment from the ATO. It is not just retirees with SMSFs. A spouse in a couple might have no other income and receive $15,000 a year in fully franked dividends.

      • Allan March 30, 2018 at 12:14 AM #

        Ben, you are correct that “it is not just retirees with SMSFs”. Like every other form of income, dividend income flows through to you as the ultimate recipient. Franking credits can never “send your tax payable negative”. They are included in your tax return together with all other income and deductions in order to determine what your overall tax liability is.

        If, based on your marginal tax rate, that turns out to be 0%, you receive a refund of the tax already paid which you are not required to pay.

        If there is a problem to be addressed, it is the suitability and fairness of the income tax rates applied at various ages and stages of life. Labor’s proposal is politically tainted, increases complexity, and leaves the actual problem unaddressed.

  26. Ben March 29, 2018 at 1:25 PM #

    It amazes me that some of those likely to be affected by this change are the same crowd that deride welfare recipients for paying net negative tax. Pay a bit of tax and the franking credits will be absorbed. Snouts out of the trough!

    • Allan March 30, 2018 at 12:01 AM #

      Not everybody is in a position to “pay a bit of tax”. Under Labor’s proposal, a person earning over $37000 receives the full 30% tax paid by the company back as a discount against their marginal tax rate.

      A person receiving a fully franked dividend of a few hundred dollars gets none of that 30% back, an effective marginal tax rate of a flat 30%. No other income from any other source is treated in this fashion.

      It is Labor who need to get their “Snouts out of the trough!” and propose a policy which is fair and effective for all. It isn’t that difficult if they would prioritise sound policy above playing politics.

  27. Paul March 29, 2018 at 1:15 PM #

    So where is the government’s response to Shorten’s short-sightedness? Two fundamental issues here. Shorten is trying to direct money to Industry Super funds and he is trying to fund his capital expenditure.

    A cleaner more equitable solution is required:-

    Premise: This country cannot afford for the growing numbers of self funded retirees (includes myself) to live for 30 years and not pay tax. Either government needs more revenue.

    Solution: Company Profit paid to Australian resident tax payers should not be taxed at company level and should be paid as an unfranked dividend to the shareholder. The shareholder declares the gross dividend on an income tax return in the same way as rent and bank interest. The correct marginal rate will then be paid as for all other income. This solves the equity issue inherent in Shorten’s proposal and has the same net impact on shareholders as the current franked dividend methodology.

    Company profit retained by the company for capital expenditure or to be paid to Non resident tax payers should be taxed at Company rates with no franking credit benefit for foreign tax residents.

    Tax all superannuation pensions either on the fund earnings or on the pension payments (currently tax free) at a concessional rate of say 5% to generate the revenue required. As I said at the outset this country cannot afford for retirees to be living income tax free for the next 30 years so lets ensure that ‘everyone’ contributes to the running of the best country in the world.

    • Gen Y March 29, 2018 at 2:59 PM #

      Paul, I can only assume Labor have run focus groups on the topic of “how can we unwind the Costello changes to make pensions tax free”. The idea of making pensions taxable did not test well in the focus groups and would give the Liberal party clear ammunition to take to the next election (remember Hockey and his ‘it’s their money’ diatribe when debate around negative gearing was a hot topic).

      Franking credits likely tested well (as the general population doesn’t understand them) and given the biggest impact will be the wealthy doesn’t give the Libs as much ammo to attack the middle ground.

  28. Phil March 29, 2018 at 12:52 PM #

    If you look at the Grattan Institute’s past proclamations, who its founders were (set up by the Rudd Government) and which media outlets tend to promote their research (ABC, Fairfax), its statements should be viewed in this light. A politically leftish tendency will naturally make them reluctant to criticise policies of a particular political flavour. There are other ‘think tanks’ from the right as well.

  29. Robert Goodwin March 29, 2018 at 12:41 PM #

    It was obvious to me that John Daley did not answer the question and waffle on about tax rates which is not what is the issue at all. The most anyone can have in any pension super fund is $1.6m as most of us know. And from that you can draw a sustainable pension of how much, given longevity? I read somewhere its about $60k and given most super is held by the male (income earner) its per couple. There are plenty of retirees on less with no government support. Anyone on a super pension will lose out Mr Daley. At least acknowledge that?

  30. charles March 29, 2018 at 12:03 PM #

    As stated, the discussion cannot rely on logic or understanding of tax rules. The proposal is a winner because once again it assumes/relies on those that don’t understand to take the side of Hitting The Rich. Why doesn’t ALP put a tax on any boat owner whose craft is longer than, say, 5 metres; increase the GST on anything the “rich” buy eg quality suits, pricey vehicles, expensive restaurants etc
    And here’s a winner: impose a CGT on family homes, when sold, above $2m , and death duties on estates worth more than $5m.
    Sorry for mentioning it, but this will probably happen

  31. Andrew H March 29, 2018 at 11:54 AM #

    Surely some simple examples put Infront of the shock jocks would assist. I get the feeling that the real reason is labour want to drive people into industry funds! I am pretty unhappy as I have set up to be fully self funded through to age 96 No plan on govt pension. This change based on a review of last tax return reduces our joint current income for our super fund by in excess of $6000 a year. If I sold of a very small amount of assets spent the money I could become eligible for part pension drawing on a lot more tax payer funds

    I get the need to prevent high wealth from receiving excessive support. The reason why I went SMSF is that for me fees in pension mode were higher in industry funds.

    • Bob Millar April 1, 2018 at 8:37 PM #

      Spot on Andrew. And as a subsequent comment from Robert Goodwin mentions, we shouldn’t forget about the $1.6m ( per person) Cap above which income is taxable.
      Shorten is doing another “Mediscare” to a sector of the voting public who swallow his rhetoric without understanding one iota of the matter and how, for some, it may EVEN affect then. The policy is a gross disincentive for people to provide for their own retirement which I currently do but very much at the margin of falling back on the public purse. Dont let the truth get in the way of someone hellbent on getting to the Lodge??.

  32. Greg Hollands March 29, 2018 at 11:40 AM #

    Once again a so called “independent” has been caught when subjected to a cross examination of their initial broad statements. The failure to understand the franking system and its impact is to blame here.

  33. William March 29, 2018 at 11:33 AM #

    It is amazing how many people, even media commentators, do not grasp the concept of Share Imputation credits and see it as some kind of “loophole” for the rich. We need to keep arguing the unfairness of labor’s proposal at every opportunity.

    • Honest Joe March 29, 2018 at 7:05 PM #

      It is fair and ethical. The refund is payment of company tax, completely ludicrous.

      • Allan March 29, 2018 at 11:50 PM #

        Tax paid at the company tax rate of 30% is refunded in full to those earning above $37000 in the form of a 30% reduction in their marginal tax rate.

        Every other form of income ultimately flows through to the individual taxpayer who’s tax liability, taking into account all relevant income and deductions, is determined at the personal level based on the progressive tax rates. Are those rates fair and equitable? That’s a separate argument entirely.

        Under Labor’s proposal, an individual with no other income who received a $100 fully franked dividend would have tax deducted at a flat 30%.

        The only “completely ludicrous” idea being touted here is the lazy and divisive policy being proposed by Labor.

  34. Michael March 29, 2018 at 11:22 AM #

    Good point re the ABC. In these circumstances, the ABC interviewers do not have the requisite financial knowledge to effectively question their interviewees.

    The sad part is that carve outs are now starting because of the obvious deficiencies and lack of intellectual rigor. It is odds on (as good as Winx) that more carve outs will occur.

    I am left with a deja vu feeling that this will be like Swann’s ‘super’ profits tax. The overstated revenues will be spent (noting the promises already made for Catholic schools, hospitals etc) even if the revenues don’t eventuate.

    But politically this works as ‘funded’ promises that can be made to the electorate. The more the better particularly when a compliant media can’t or won’t see the game being played.

  35. John Daley March 28, 2018 at 11:28 PM #

    I think that “changing tax rates” and “changing the detail of how franking credits work” is probably close enough for all but the tax tragics.

    • Gen Y March 29, 2018 at 7:57 AM #

      Keep fighting the good fight John!

    • Warren Bird March 29, 2018 at 11:11 AM #

      I have a different view, John. Bad policy is bad policy. If the issue is that decisions in the past have disrupted the progressiveness of the personal income tax system then the way to address that is with a policy that addresses progressiveness explicitly. Not a policy that disrupts something that was actual a very good reform and which has required backtracks and exemptions to be announced since it was first mooted!

      Is good policy making too much to ask of someone who would be Prime Minister? Maybe that’s why we haven’t had very many good ones lately – we haven’t asked them to be good policy makers, but simply to manage vested interests and to please all the people all the time.

      • Warren Bird March 29, 2018 at 2:00 PM #

        OK, let’s try to put this another way to show how important the principle I wrote about actually is.

        Think about a tax payer on a marginal rate of 47%. They earn above $180,000 per annum. The imputation credit system means that the company earnings that their shareholdings earn get taxed at 47%. The company pays 30% and the high income earner doesn’t have to pay that again, but they have to top up the other 17%.

        See how important it is to think of the earnings of the company as being the earnings of the individual shareholder.

        They pay 47% on all their income over $180k whether it comes from dividends, salary, rent or interest. 30% is collected for the government by the company, and then the other 17% is collected via the individual’s tax return.

        Now look at a taxpayer in the 19% bracket. Their income is $18,200 up to $37,000. If they have some shares then the income they’re entitled to is taxed at 30% in the hands of the company. The ATO repays the 11% excess tax to them. I’m not hearing anyone argue that this should be stopped. It’s all part of a fair tax system.

        If you accept that this is an appropriate element of the tax system, then why is it so hard to accept that a taxpayer who is on the zero marginal tax rate should get back all of the 30% tax that’s wrongly been paid on their income?

        Tax payers get refunded tax taken out in PAYG payments that shouldn’t have been taken out because they donated it to a charitable purpose or incurred a legitimate work expense, so it’s not as though the principle of tax refunds is objectionable.

        Which brings me back to the fact that the real issue is the question of whether the zero income tax bracket should only be those individuals who earn below the threshold of $18,200 or whether there are other categories of individuals it is fair to put in that category even if their income is more than that. Mr Shorten has accepted that there are – charities, some kinds of pensioners, genuine low income earners. He’s revealed that his real target is retirees who aren’t taxed on their self-funded retirement income even if it’s substantial simply because they’re over 60. So why not address that directly, which would seem to be a lot simpler?

        Mr Daley, this is not something for ‘tax tragics’, but for people who care about how policy is made and how the people of Australia are treated by their government.

      • Honest Joe March 29, 2018 at 7:07 PM #

        It is fair and ethical. The refund is payment of company tax, completely ludicrous.

    • Allan March 29, 2018 at 11:38 PM #

      John, in your recent article on the Grattan institute website “A piecemeal move towards a fairer tax system”, you state:

      “So abolishing cash refunds, but keeping franking credits for those who do pay income tax, is probably not first-best policy. It abandons the principle that all company profits should be taxed at an investor’s marginal rate of income tax. And it reduces the incentive for retirees to invest in companies from Australia rather than overseas.”

      and later in the same article:

      “A first-best policy would reintroduce a number of higher-income, higher-wealth older Australians to the tax system by taxing superannuation earnings and abolishing age-based tax rates. But in the absence of the political will to make these changes, abolishing cash refunds provides a big boost to the budget bottom line from more or less the same group.”

      https://grattan.edu.au/news/a-piecemeal-move-towards-a-fairer-tax-system/

      Throughout the piece you demonstrate that you clearly understand the shortcomings of the policy as proposed. You understand what the real issue is and how it could be addressed. Yet you dismiss others with similar concerns as “tax tragics”.

      I would suggest that those concerns are based as much on fact as your assessment is, with the exception that not all of us are prepared to accept that sub-standard, politically tainted policy is acceptable from any party. Unlike you, many of us don’t accept that “abolishing cash refunds may well be a reasonable second-best policy in a tax system rife with distortions.”

      Without wishing to be unkind, given the source of much of the Grattan institute’s funding, it would seem Labor are being cut some slack on this that other half-baked proposals in the past have not been afforded.

    • VAV April 5, 2018 at 9:16 PM #

      Not to me John. The effects on my circumstances are significant so it should not be trivialised.

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