Frankly annoying

Friday, May 17th, 2019

In this View, I am taking the liberty of expressing my personal frustration at the current franking debate. In particular, I am expressing my frustration with the prosecution by the ALP of its proposed policy to abruptly change taxation rules that have existed for decades regarding franking credits.

Whilst there is no doubt that important national policies must be dynamically managed, it is my view that this should occur inside an agreed and stable national policy framework. Over the last 120 years what is important to Australian society has become the responsibility of our government, our parliament and under their direction our bureaucracy and public service.

Therefore economic, social, healthcare, aged care and education, environmental, taxation, foreign policy, trade policy, defence and retirement policy (amongst others) is managed by government. In effect, they are our custodians for policy management and they should take policy forward so that each change is indisputably for the better.

Retirement policy by its nature must have a long term policy setting. Young workers today will participate in retirement policy for the next 50 to 80 years – from accumulation to pension. Recent retirees will be governed by policy for the next 30 to 40 years – managing a finite capital base to meet their needs. A Commonwealth pension safety net must endure.

All significant national policies should be managed by government with sensible, logical and fair adjustments made for changing circumstances or when a better understanding of the facts occurs. Any change should ensure that the aims of national policy are achieved. That is what the Government, answerable to Parliament and to the people, is elected to do. That is the basis of our democracy.

Consequently, there is a legitimate expectation that changes to policies inside an agreed framework are consistent, properly developed and agreed. National policy and significant changes to it should only be done after thorough investigation and research by or at the direction of Parliament. There is also the legitimate expectation that Australia’s most significant policy settings, that will endure for decades (particularly pension policy) will be set from a sensible bi-partisan approach.

This leads to my growing frustration with politicians of all persuasions and which I feel is a frustration that I share with many other Australians. Simply stated I perceive that there is a clear lack of sensible bipartisan agreement on the policies that are right for Australia.

The political debate is rarely supported by factual arguments and is arguably commonly undertaken with bias, a lack of integrity, transparency and/or honesty.

In particular disclosures of conflicts of interest by politicians are rarely if ever made before or when a politician argues their case. I wonder whether politicians themselves can honestly state they are abiding by the principles which the Hayne Royal Commission set for the financial services industry:

  • Obey the law
  • Do not mislead or deceive
  • Act fairly
  • Provide services that are fit for purpose
  • Deliver services with reasonable care and skill
  • When acting for another, act in the best interests of that other

Politicians and political parties constantly and seemingly on a whim change their positions on significant national issues. They, therefore, create distrust amongst the electorate and undermine the democratic system. The result is clear to see – directionless governance and a parliamentary quagmire with many members voted in by default – mainly in the Senate to create a hung parliament.

What is best for Australia should in most cases be obvious. When it is not obvious or subject to conjecture, it needs to be thoroughly investigated and researched by experts, from both commercial and academic backgrounds. The most intelligent, and hopefully the most ethical of our society, should be asked to develop the solutions that become the framework of our most significant national policies. The parliament should review and generally adopt the recommendations. National policy direction and its requirements should then been properly codified by parliament into clear law so there is no misunderstanding.

There are clear long term benefits for a country, for a society and for an economy, that adopts an agreed national policy framework or an agreed strategic and significant policy direction. This seems a fundamental requirement for Australia where society expects our government and parliament to manage fairly for all – including future generations. Citizens will readily support rules that are consistent with the agreed national plan – more so if it is properly created, recommended to and adopted by parliament and then clearly communicated.

That long introduction brings me to my annoyance with the ALP franking policy.

I simply ask this – How can the ALP honestly and ethically develop or change the franking rules, that operate inside Australia’s retirement policy, without drawing upon a proper enquiry or investigation (ethical and intelligent) that supports it?

I find it particularly disturbing that Australia does not have a clearly enunciated national retirement policy by which success or failure can be measured. By not having such a policy then there is no basis to access proposed changes.

The proposed ALP franking changes, simply do not conform to the agreed national retirement policy of Australia because there isn’t one!

Australia’s superannuation system was created (theoretically at the time) to reduce the burden of a growing number of retirees/pensioners, on the Commonwealth pension scheme. The “safety net” of public pensions is funded through the taxation of the income of workers and companies and the returns on capital of investors. Since the creation of the contributory accounts based superannuation system by the Labor Government of the 1980s, Australia expanded its taxation base (via a GST) to deal with expected budgetary shortfalls. To this end the Howard Government created a convoluted and State-sanctioned GST, replacing state-based sales taxes, that today is almost impossible to change – even if it was for the better.

Readers will recall that it was Paul Keating who originally proposed the GST in 1985 but failed and then hypocritically argued against its introduction to defeat the Hewson Opposition in 1993. When John Howard introduced the GST in 1999 it was opposed by the ALP. So much for the creation of a national tax policy in Australia. Rather we observe a history of political interference with what should be done and little acknowledgement of the best taxation policies adopted by our overseas peers. I draw a similar conclusion when I look at the retirement policy of Australia.

 

Franking

Franking was introduced into Australia taxation law in 1987. Before and since that time some of the 36 OECD member countries (of which we are one) have flirted with franking. The majority have clearly dismissed it as a complicated and unnecessary system. Whilst there are easier ways to stop the double taxation of dividends Australia is just one of just five OECD countries to have a full franking system. The other 29 OECD countries that don’t have any form of franking generally have lower income and company tax rates than we do.

In 1999 the Howard Government changed the law so that franking credits would become fully refundable. So today (as the ALP claims) Australia is the only country in the OECD to have cash rebate franking.

So is there a problem with franking? Australia’s unique implementation of franking? Or is it the retirement system and its interaction with taxation policy that needs fixing?

The answer would clearly be uncovered by a properly convened national taxation or/retirement policy enquiry – but as we know that enquiry will not be held in the current political climate. Therefore Australia is left with a taxation system that is complicated and which excessively taxes income and risk capital whilst under taxing consumption.

In this vacuum, we are confronted by the ALP proposals to change the franking system even though these are inconsistent with what they previously described as good policy and over which they presided as Government from 2007 to 2013.

It is worth recalling that in 2000, Simon Crean as shadow ALP treasurer, said this when the Howard franking bill was debated.

“Under this proposal, they will obtain a refund of their income tax from the Taxation Office, representing the excess imputation credits. Labor included this proposal in our taxation policy prior to the last election. Therefore we have no difficulty supporting the proposal because it is our policy. It builds on the major reform accomplished by Labor almost 15 years ago and it improves the current taxation situation faced by low -income investors, especially retired Australians”.

Labor was in government from 2007 to 2013. It apparently did not occur to them, when they had the opportunity, that franking cash rebates were unfair. Nor did they conclude that they were unaffordable even as the budget deficit ballooned to record levels. It was the ALP that presided over a $27 billion deficit in FY09, a $54 billion deficit in FY10, $47 billion deficit in FY11 and $43 billion deficit in FY12 – creating a debt that continued to expand under the current coalition Government.

In 2010 the Rudd Labor Government formed Australia’s Future Tax System Review (The Henry Tax Review). The review had the noble ambition of guiding the tax system for the next 10 to 20 years. From 138 recommendations the Rudd/Gillard Government seemingly adopted just one (a Resource Super Profit Tax). The significance of the enquiry was its insignificance, in that it did not receive bi-partisan input or support. The opportunity to deal with franking was glossed over because it was not perceived as a problem for the budget.

The above table on closer inspection also exposes a subtle point regarding the significance of franking credit cash rebates. The ALP notes that in FY2000 cash rebates amounted to $500 million and this has now ballooned to $5 billion in 2019. Today Australia’s economy is 3 times larger than it was in the year 2000 ($650 billion to $2 trillion) and it is axiomatic that franking rebates will grow as the economy grows.

Whilst cash rebates have grown faster than the economy and now represent just 1% of budget revenues, it is the result of a growing self-managed super industry and the desire of over a million Australians to look after themselves in retirement.

The benefits of franking cash rebates have been accessed by people who trusted the law as proclaimed by both sides of parliament. The fact, which I accept, that a minority of people (less than 1% of SMSFs) excessively access franking credits is something that both the ALP and the Liberal Coalition could easily rectify. Why they don’t do so following an agreed tax/super enquiry is another reason as to why I am fed up with this franking debate and politicians generally.

The table below shows that those whom excessively utilise franked cash rebates are easy to identify. Why is there not a reasonable benefit rule brought into the franking regime for the benefit of an average self-funded retiree?

The ALP policy fails the public policy test. It is not designed to improve Australia’s retirement policy because there is no outcome to which either the ALP or indeed the LNP has committed to. Both parties have no sense as to what is a good national retirement policy and what Australia’s pension system should look like.

The fact that over 70% of retirees still need access to a full or part paid Commonwealth pension shows that we actually do not have a national retirement policy that works. So why is that not an issue in the current election?

What really annoys me about the franking debate

I noted earlier that I rarely see politicians who disclose their conflicts of interest prior to arguing a case for change or no change. Yes, there is a parliamentary register of interests but it is presumptuous to expect that 25 million Australians have this at their disposal as they listen to politicians argue for or against policy changes.

One clear conflict is seen for those members of parliament who currently negatively gear residential property investments and who will benefit from grandfathering laws even though they state that these taxation benefits are grossly unfair to average taxpayers.

Another conflict will be created when and if the parliament proposes and debates a proposal to change to the law regarding franking credits and SMSFs, whilst maintaining the benefits of old parliamentary schemes. How many politicians are beneficiaries of the old Commonwealth Defined Benefit Scheme with its grandfathered entitlements?

From 2004 to 2006, the parliament took several decisions to reduce the burgeoning cost of defined benefit superannuation liability. These included closing the Parliamentary Contributory Superannuation Scheme to new members of Parliament from 9 October 2004.

Shifting politicians and other public service employees from defined benefit to accumulation schemes reduced the fiscal risks to the government (i.e. the taxpayer) and checked the growth of the superannuation liability arising from civilian public sector employees. The massive projected growth in the Commonwealth defined benefit liability is captured in the next table from the budget of FY08.

Any parliamentarian who retains their pre-2004 defined benefits has a clear conflict of interest in arguing for changes to cash franking rebates that accrue to self-funded superannuation schemes.

Simply stated the politician’s conflict is this. Whilst the taxpayer has contributed by paying tax to fund my lifetime pension, I am not prepared to give it up. However, in the interest of “so-called fairness”, I support changes that take away franking cash rebates from retirees who rely upon them to fund their retirement. Whilst they relied upon government policy (which I supported) they can no longer do so because we can change that policy on a whim. However, we will not change a policy that grants me a lifetime indexed pension.

How does any politician argue that? The answer lies in integrity – or the lack of it.

The Future Fund of Australia has $150 billion of assets and is still apparently underfunded by $100 billion to fulfil its design to meet the unfunded defined benefits of ex Commonwealth public servants including politicians.

The Future Fund has not paid a pension to any of its beneficiaries since its creation in 2006. Indeed, it is not expected to pay a pension until at least 2026. By that time, it is hoped to grow to $250 billion in size whilst Australian taxpayers pay approximately $8 billion per annum in pensions for these public servants that will in the future include some current politicians.

To coin a phrase – how many hospitals and schools could be built if the Future Fund was today directed to pay its own pensions from its $150 billion fund?

In conclusion, I want to address the two furphies that are consistently stated by those who support the proposed cash franking rebates changes.

  1. It is claimed that members of SMSFs in pension phase pay no tax. Everyone (including pensioners) pay GST and that is tax; and
  2. It is claimed that pension members of a pooled super fund will receive a franked cash rebate under the ALP plan. They won’t. Franking credits (not cash rebates) will be generated by pension members but they will be used by accumulation members to minimise their tax. It is up to the trustees of pooled funds to arrange a debit to accumulation members and a corresponding credit to pension fund members inside the pool. The policy change as proposed results in tax being minimised.

Australia urgently needs a retirement (and a taxation policy) that is equitable and fair. It should be designed to endure and be appropriate for future generations.  It should be designed to ensure that all Australians can look forward to retirement without fear because an appropriate safety net is in place. A safety net that everyone has contributed to during their working life.

Longevity risk needs to be factored in and SMSF pensioners equitably treated so they don’t become a burden on the social security system.

Most importantly, the policy should be designed so that future governments are bound by the national policy framework with changes only recommended and approved if they enhance the clearly stated outcomes.

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10 Responses to “Frankly annoying”

  1. William Barlin says:

    Thank you for this article. It is informative, to the point and most importantly it points out that our political system is divisive (haves and have-nots argument); is capable of unfairly impacting upon some community members (presently those that went the SMSF way of providing for retirement); does not allow for long-term policy settings and management; politicians are not answerable for mismanagement of own promises, the economy and underlying resources of the country; politicians seek electors to vote on the basis of splashing the cash that has been, in the first place, scooped from the taxpayers (those blamed to be filthy rich…); there is no notion on advocating the growth of the pie, instead election arguments are based on redistribution of current capital…; a very disappointing that after 50 years hard work in this country and my wife now disabled, she has to pull out over $6000 in tac credits to the government and having only $500,000 in SMSF to last her for the rest of her living time…

  2. EDDIE O'Reilly says:

    Just a great piece of analysis–well done!!.

  3. cliff hignett says:

    Hope your little rant ‘frankly annoying ‘ makes you feel better. The ALP released this policy proposal 12 months ago. Neither you nor anyone else in the liberal party chose to set up the discussions you claim should have happened. Unfortunately, the liberal party no longer have any democratic procedures to workshop this sort of stuff anymore. I suspect the Liberal party dont actually have any active members anymore , so their policy development needs to be REALLY simple. like ” dont vote for ALP”.
    Hopefully, a long stint in opposition will fix the problem.

  4. Leo Savas says:

    Your Article about the Labor party’s Franking policy is amusing and somewhat disconnected with reality. The policy is addressing a moral and an ethical issue by way of a policy frame work. The moral issue is “Should citizens who are not paying tax get a tax refund”. The other moral issue is should low salary earners be taxed at the same rate as high salary earners or the same as Businesses.
    From an economic analysis point of view one should also address the slogans developed behind the ideological belief of the Trickle down belief and the notion that it is business that creates employment and not the consumer with amble discretionary spending capability.
    I recommend that next time you put pen to paper to write such articles that you engage your moral values first before your political values or the values derived from a financial analysis based on capitalist beliefs instead of Democratic socialist beliefs.

    • Gerry says:

      Well said. I can’t help wondering if those who push their own political values as the author has done, understand at all that a vibrant economy depends upon more people spending on goods and services rather than more people buying existing assets.

  5. Cynthia says:

    Well argued. What stays with me about the absurdity of the Labor franking credit policy is that wealthier people still have the opportunity to utilise franking credits as a tax offset, whilst the relatively poor end of the retirement spectrum won’t. Many of these are older women, who, as Bill Shorten has stated, did not have the opportunity for, or consistency of, high income careers. These same women are the least likely to secure paid work. If they earn’t $20 000 in paid employment they’d pay about $255 tax. If they cobble an income together from investing and earn $8400 in dividend income they will suffer a net loss of around $3150 in relinquished franking credits. The effective tax on $20 000 becomes around $0.15 per dollar earnt. For a PAYG employee the figure is $0.013 cents per dollar earnt. In this instance, the small investor will effectively pay 91% more tax than someone with a low income job! There is no equity in that. The ALP have formulated ageist, sexist, insensible policy on the run.

  6. Very long winded about a simple issue. No wonder some people are confused if they had to read all of it. It is a refund of tax already paid That is all that needs to be said.

  7. Michael Muldoon says:

    You didn’t mention that the Futures Fund arose thanks to $60.5b from sale of TLS etc our asset? And it Banked $835m in franking credits in 2018 suggesting that only $1.9b invested in Aus shares out of 145b in assets. All politicians have an interest in the Futures Fund so no wonder it was the first exempted. FAR GO FOR ALL – indeed!

  8. Gus says:

    I am a 67 years hold and unfortunately I have a SMSF, I have a message for joung people in the workforce to day: ” Blow your money with your joung family and your wife and travel the world that way you will be able to enjoy life while you are working (about 40 years) and
    do not wait to collect your super at 65 or holder for two reasons , one you may not get to that age (is not my wish) and second after 65 years of age you do not have another 40 years.

  9. Ray Pridmore says:

    I cannot allow to pass without comment the quote by Mr. Savas, “Should citizens who are not paying tax get a tax refund”. In posing such a question in respect of the proposed labor policy M. Savas, like Mr. Shorten, is displaying either ignorance or deceitfulness. The word “impute” means “to ascribe to a source” and the entire imputation system is based upon the fact that the tax being paid is ascribed to the person paying it. The fact is that if the company did not pay tax the shareholder would presumably receive a 30% higher dividend than the one he actually receives. Imputation recognises that the company has taken that tax prior to payment to the shareholder in exactly the same way that an employer takes the tax from the wages of an employee. If an employee is subsequently found to have suffered from his employer overpaying tax on his behalf then, quite rightly, he receives a refund. A shareholder is entitled to exactly the same reimbursement. It is Mr. Savas who needs to engage his moral values (and intellect) before putting pen to paper.

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