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.