Labor, let’s face the facts on fairness, women and franking

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“We will not allow the Government to lecture us when they argue that tax loopholes for the wealthy are actually a secret socialist mechanism to redistribute income to the least well off in this country.

I believe that Australians actually want a better tax system. They want a tax system which doesn’t subsidise the high-priced medico on $500,000 being able to split income and pay less tax than the nurse on $50,000 a year.

Australians do not want to see a tax system which finances the lucky few who own big pools of shares. And then not only do they get the dividends from the shares, the income from the shares, and pay no tax – they shouldn’t in this case be allowed to get a 30% loading for owning shares in this country and pay no income tax. It is not sustainable.”

Bill Shorten’s Address to the Victorian Labor Conference, Melbourne, 27 May 2018

 

The next federal election will be fought on tax. That’s good news as reform is overdue. While politicians have been fiddling with our tax system for years, there has been no meaningful tax reform since John Howard introduced the GST 18 years ago.

But any debate on tax must be based on facts not rhetoric. Unfortunately, that’s a hard thing to achieve, and many of the contributions to the debate right now are unhelpful. It appears to me that Labor, in particular, wants to divide Australians into villains and victims.

I asked a senior tax partner how Opposition Leader Bill Shorten’s statement above, that a “high-priced medico on $500,000” could pay less tax than a nurse on $50,000, could be correct. He said it would not be possible except in a very specific case of a doctor with many children aged 18 and over with no income plus a string of loss-making investments. Last week, the Deputy Opposition Leader Tanya Plibersek vowed to make sure “the rich pay their fair share of tax”.

‘Rich’ taxpayers already paying more than a ‘fair share’

The words ‘rich’ and ‘fair share’ are highly subjective, so let’s look at some facts. A person earning $40,000 a year pays $5,347 a year tax including Medicare levy, or 13.4% of their taxable income. A person earning $95,000 a year pays $24,682 tax, or 26% of their taxable income. A person on $400,000 a year pays a whopping $161,232 in tax. That’s 40.3% of their taxable income.

According to the latest ATO statistics, just 2.9% of taxpayers earn more than $180,000 a year, and they contributed 29.8% of the total income tax collected. There were 16.6% in the second-lowest tax bracket and they contributed 39% of total income tax. So 19.5% of taxpayers are contributing almost 70% of our total income tax.

I would say that those top-bracket earners are punching way above their weight.

What about women as victims of the tax system?

I have been a strong defender of women’s rights long before the topic became fashionable and I am across the points that are regularly made in the media. On average women retire with much less superannuation than men, and their pay is much less than men. But working women tell me one of their biggest challenges is childcare, which can cost over $100 a day per child. Consequently, many women are choosing to structure their employment to maximise the opportunities to care for their family at the expense of a higher income. And leaving the workforce to have children and raise children can have a big impact on their final superannuation balance. These issues will not be affected by tax policy. To make changes here, other policies would be required.

But facts don’t get in the way of spin. Recently on ‘The Drum’, Ben Oquist of The Australia Institute argued that “negative gearing discriminates against women”. His rationale was that the majority of investors who use negative gearing are men. Most investors in residential property are couples, and for tax deduction purposes the asset is normally put in the name of the higher income earner, who is often the bloke.

And what is Labor’s solution to solve the situational problems many women face? It is to take the GST off tampons, since the tax discriminates against women, as these products are an essential item for many of them. Well, Bill, I have news for you – there is GST on toilet paper and we all need that. It’s a very slippery slope. In any event, if we can believe my local pharmacist, removal of the GST would save the average woman just $18 a year, or a couple of hours of childcare.

Another issue in the coming election campaign will be catch-up concessional superannuation contributions. They were introduced by the Coalition from July 2017 to enable people who have been absent from the workforce – usually women caring for young children – to make extra contributions when they re-join the workforce to help them catch up on their super. It’s sensible and workable. Yet Labor, who claim to champion women, is opposing it. Work that out.

Who really loses from Labor’s new franking policy?

Labor’s latest attack on franked dividends is not a tax on the wealthy: it is a tax on widows.

Let me show you this step by step. The imputation system, which avoids dividend income being taxed twice, will stay in place. Labor proposes to abolish the refund of excess franking credits. There will be no tax collected from large retail funds and industry funds, as they can spread the imputation credits over all their members. And Labor has promised to exempt ‘pensioners’, so no revenue there either.

So let’s think about who is left, on a case-by-case basis.

A) SMSFs in pension mode with two members holding a total balance of less than $3 .2 million

They could be seen as the prime target, because all their excess franking credits will be lost under Labor’s proposal. But that is simply solved.

One option is to close the SMSF and roll the balance to a large retail fund. Another option is to cash in their entire holding of Australian shares, which can be done tax-free, and roll over the cash now freed up to a second superannuation account with one of the retail funds, choosing Australian shares as their preferred asset class. The SMSF trustees can make any investments they choose – avoiding Australian shares – in their SMSF, optimising their mix for the current tax situation.

B) SMSFs with large balances

This would appear to be an easy target, but the Coalition got there first. Think about a portfolio of $10 million, which has a fairly standard asset allocation of cash 20%, Australian shares 35%, international shares 25% and property 20%. Let’s say the annual income is $390,000, including franked dividends of $140,000, on which franking credits are $48,000. When you gross up the income for the franking credits, the taxable income of the fund becomes $438,000.

Before the Liberals changed the system last July, the franking credits of $48,000 would have been refunded. But because the fund is 70% in accumulation now, the tax payable by the fund becomes $46,000. Imputation credits pay all this, leaving just $2,000 for revenue under Labor’s policy. I’m sorry Bill, but Malcolm beat you to it.

C) Older, wealthy, self-funded retirees

Their situation should remain unchanged. Let’s say their main asset is a portfolio of $4 million Australian shares in joint names paying franked dividends of $90,000 a year to each person plus franking credits of $38,571. The tax on that will be around $38,000 including the Medicare levy, which means they may lose possibly $600 in franking credits. Small bikkies.

So who is left over to pay the tax? We have raised almost no extra tax so far.

Impact on widows and widowers

Think about a married couple who own their own home, have $75,000 in bank deposits and a share portfolio worth $710,000 returning dividends of $32,000 plus franking credits of $13,700. Their age pension is $19 a fortnight combined, so total income – including franking credits and interest – is $47,700 a year.

Let’s say the man dies suddenly, leaving all his assets to his wife. Her situation will change dramatically. The assets she has inherited take her over the Centrelink cut-off point. She will lose her pension, as well as the concession card that goes with it. The good news is that she will keep the franked dividends of $32,000 but the bad news is that under Labor’s proposal she will lose the franking credits of $13,700. Labor’s proposed measures have finally raised some money!

Hopefully anybody in this situation will have taken good estate planning advice to ensure a more effective distribution of assets when one party dies, so the survivor can retain a part pension and all the franking credits.

 

Noel Whittaker is the author of numerous books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See www.noelwhittaker.com.au.

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46 Responses to Labor, let’s face the facts on fairness, women and franking

  1. Dexter June 11, 2018 at 2:06 PM #

    Great article by Mr Whittaker…….but I am afraid I can’t grasp his point re “older, self funded retirees”………namely….

    “Their situation should remain unchanged.
    Let’s say their main asset is a portfolio of $4million Australian shares in joint names paying franked dividends
    of $90,000 a year to each person plus franking credits of $38,571.
    The tax on that will be around $38,000 including the Medicare levy, which means they may lose possibly $600 in franking credits.
    Small bikkies”

    ……..It doesn’t make sense to me sorry ….How does a tax bill of $38,000 suddenly drop to only $600 ?? – surely the tax bill will result in each person only getting $571 out of the Fr Cr of $38,571 they used to get ??

    • Graham Hand June 11, 2018 at 2:09 PM #

      Hi Dexter, Noel is saying that if the tax is $38,000 and the franking credits are $38,571, then all that will be lost due to the Labor policy is the refund amount, or about $600 on a $4 million portfolio. Labor is not removing franking, but the refund of excess credits not used by a tax liability.

  2. MC June 9, 2018 at 6:24 PM #

    Thank you, I think its important to clarify this in the public space.

    Under Labor’s proposal a SMSF in pension phase is not a zero tax environment after all.

    And it appears to be a surgical strike against self funded retirees with a SMSF in pension phase as pooled industry funds are able to fully exhaust their franking credits and are unaffected.

    A flat rate of 30% on that portion of funds earnings, specifically when they are in pension phase, is a substantial cut to living standards which ever way you look at it.

    You are a highly regarded voice in the investment space. I have followed your writing though out my working life and have benefited greatly. Now entering my retirement stage, I need you more than ever to help protect me from stupid populist political proposals by lending your strong voice to the public discourse in this matter.

  3. Noel Whittaker June 9, 2018 at 6:23 PM #

    Hi MC, In pension phase, YES.

  4. MC June 9, 2018 at 6:22 PM #

    Great article!!
    However Re; your comments.for self funded retirees: \”Their situation should remain unchanged. Let’s say their main asset is a portfolio of $4 million Australian shares in joint names paying franked dividends of $90,000 a year to each person plus franking credits of $38,571. The tax on that will be around $38,000 including the Medicare levy, which means they may lose possibly $600 in franking credits. Small bikkies.\”

    This is true in accumulation stage. But is this correct? If I am a self funded retiree in pension phase. My tax rate is zero. I loose all my franking credits. in this case I loose $38,000. Or have I misunderstood

  5. Mark June 7, 2018 at 8:09 PM #

    Well, judging by the lack of an effective response to the challenge I set concerning John and Jenny, to quote the late Martin Luther King: “…these principles I hold as self-evident…”. But, as always, none are so blind as those that will not see.

    That award goes to Peter Thompson who appears to have surrounded himself with his own “interesting” politico-economic construct. Peter, there are, I believe, well over 2 million retired Australians, me included. Many of these citizens have worked very hard and have been very diligent and made many sacrifices in saving for a retirement under the ruling laws to ensure they are not and continue not to be a burden on the taxpayer via the welfare system. I, personally, am very proud of not having to put my hand out for assistance. A goodly proportion of the incentive to pursue this path must be enshrined in the tax free status of the super pension and the ability to claw back tax from dividends where tax has been pre-paid. As has been previously noted by Warren Bird, this is “costing” the government a pittance in real terms and Shorten is surely playing the class warfare game (shock, horror).

    On the principle that every individual or financial construct pays tax at their own legislated rate, talk about outdated decisions is just a very bright red herring. This always has been and will continue to be a sine qua non for fair taxation. Any deviation from this well established principle is just a flight of fancy and really not worth expressing since it represents emotion over reason.

    On the same basis, the last assertion that no dollar of corporate earnings should go untaxed is true if those earnings are retained in the company. However, once the company distributes any of those taxed earnings, the tax liability rests with the final recipient and is rightly calculated on their marginal rate and tax environment. To deviate from this is like not allowing full tax deductibility for a company paying wages to its employees.

    In conclusion, this is really a very simple situation. Guys, please put aside political and/or personal biases, eschew the disgustingly divisive politics of the likes of Shorten and just let people who, in the “golden years” of their lives, simply want to be left to live out their final years with pride, dignity and serenity without putting their hands into others’ pockets. I don’t think it is asking for too much.

  6. Peter Thompson June 6, 2018 at 12:59 PM #

    Your points are well made Warren Bird. I have gone away and read Chapter 14 of the Campbell Inquiry, on your prompting, and I think we should acknowledge the now very dated historical context in which that report was written. It is true that nothing written there counters your argument, but is also seems clear to me that the authors of that report (written more than a decade before Keating introduced the superannuation system) simply do not envisage the situation where a dollar of earnings from BHP or CBA or Telstra or any company should ever be tax free. Self-evidently, the Campbell Inquiry did not envisage the current situation where so many of the shareholders of Australian companies are themselves in a tax free environment (i.e. pension-phase super). Now, as I think you have pointed out previously in another post, the real conversation to have may well be about whether pension-phase super should really be completely tax free. But one suspects that the political reality of changing this goes well beyond considerations of dividend imputation, and that zero-tax pension phase super is probably an untouchable, sacred cow. Labor deserves some credit with their proposal (as does Keating, who originally introduced it) for having the courage to, if not tackle then bypass the sacred cow, and disallow the refund of excess franking credits. Simply because it makes no economic sense that any dollar of corporate earnings should ever go untaxed.

    • Warren Bird June 6, 2018 at 6:10 PM #

      I think I’d better make this my last comment on this topic. But I personally know people who worked on the Campbell Inquiry and can confirm that the intention of the discussion was a complete removal of the corporate veil in this respect for all end tax-payers, including those on tax rates below the company tax rate.

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