Frankly, this is unfair

Thursday, April 12th, 2018

There is no doubt that Australia’s franking system has lots of flaws. Today, we are one of the few countries in the world which maintains a franking system, and probably the only one that has cash rebates of franking.

The Labor Party (the Federal Opposition) has now pushed franking into the spotlight but has chosen to do so with a highly questionable policy proposal. Its proposal hits many people in a harsh fashion while securing ongoing franking credit benefits for others. While the logic of the proposal is not obvious, there is an underlying reason for it and SMSF trustees need to be on red alert.

The cessation of franking is not being proposed by the Labor Party.  Indeed, their proposal acknowledges that after twenty years of cash rebates, franking is engrained in our taxation system. It is our view that the Labor proposal, unfortunately, is not well thought out nor is it properly structured and above all it is not fair!

The Labor proposal

The Labor party is now proposing a crude hybrid approach – by clipping the edges of franking. It is crude because Labor wants to grandfather benefits for a certain part of the population while others would be stripped of benefits.

Labor’s original proposal (of just 3 weeks ago) to scrap franking credit refunds that directly affected SMSFs and low-income earners was a poorly structured policy and is now acknowledged as such. It was produced after no public discussion and certainly no engagement with professionals who operate in the superannuation market. Regrettably, the new changes make the original proposal even worse and seem designed to punish some while cementing benefits to others.

The amended proposal is unfair as it represents the arbitrary demarcation of benefits that flow to members of our society. The proposal is that a member of a SMSF whom is not receiving a Government pension before midnight on 27 March 2018 will never be able to claim a cash franking rebate in their SMSF. But a similar person whom has a SMSF and is also receiving a Government pension on 26 March 2018 (or before) can – and for the rest of their life!

While the second person appears a winner, we suspect that the promise of grandfathering would not be one that could be relied upon for it depends upon the integrity of politicians and future governments.

This policy is an unfortunate example of the frequent and unfair approach adopted by many Governments to arbitrarily and unfairly adjust legal benefits between members of society. Normally such changes are not done in retrospect, but the Labor Party has adopted a hybrid structure. If they form Government in 2019, then the law will change effective a year before they are elected.

In this case, Labor’s policy would create sub-classes of “lucky” and “unlucky” Australians. An Australian will be “lucky” if they are entitled to a tax cash rebate and “unlucky” if they aren’t. No logic, no structure or concern with fairness – just a sledgehammer approach arbitrarily adopted – when it need not be.

We question whether Labor considered or understands the effects on an Australian self-funded retiree if they fall on the wrong side of their arbitrary line in the sand. A retiree (after 27 March 2018) with the average $1.2 million pension fund (SMSF) who is denied any cash franking rebates will now need hundreds of thousands of dollars more in saved capital to generate the same return as they did before the change. Indeed the differential will worsen the longer they live.

It appears that “baby boomers” with above average wealth are under general attack by Labor. Yet it is these people whom have saved to ensure that they do not claim a tax payer funded pension and for that they receive no recognition.

Most concerning of all, is that the proposal is clearly an attack on SMSFs. It creates a two-tiered SMSF system which benefits some and discriminates against others for no logical reason.

This policy to split SMSFs into pieces will make SMSFs a complicated area of financial services to advise upon and for trustees to manage. By putting that line in the sand, Labor will make the advice on managing and constructing an appropriate asset allocation for SMSFs unnecessarily difficult.

Is Labor attempting to force retirees to give up managing their own super?

It is time for the Labor Party to come clean with the Australian population and declare whether they support Australians saving and looking after themselves in retirement. Or is it Labor’s policy to force all Australians into industry funds?

Once Labor opened the “franking can of worms” it suddenly came into focus that industry super funds are running their members’ funds with pension money and accumulation money pooled together. Pension members of pooled super funds may not have been aware that their franking credits on their share dividends have been utilised by accumulation members liable for the 15% superannuation tax. We can only guess at what tax credits and benefits have been dispersed from pension members to accumulation members. We can only guess as to how much tax has been lost by the government in this opaque structuring.

It is important to understand that the transfer of franking credits from pension funds to accumulation funds can also reduce the contributions tax liability of pooled funds. Therefore the tax base that funds Commonwealth pensions is also decreased by this arrangement. As we will see below the industry Funds are really just tax effective savings funds and only super funds by name. This is because only a minority of their members will ever have enough super to retire comfortably.

This makes the proposed Labor changes to SMSFs even more unfair, because SMSFs never have and never will have the ability to disperse taxation benefits between members inside their fund. Labor’s policy leaves the franking benefit offsets inside industry funds whilst attacking self-funded retirees.

The declared policy to operate from 27 March 2018, if Labor is elected in 2019, will destabilise the SMSF industry to the benefit of the industry funds. The rejection of a “reasonable franking cash rebate” limit to be available to all investors, which has been presented by many super professionals – including ourselves in previous editions of the The View – is a stark example of this. Fair cash rebates can be maintained but seemingly the Labor Party sees this as specifically beneficial to SMSFs and against the interest of industry funds.

Every change has a consequence, some intended, many unintended. Political parties need to propose policies that have both integrity and fairness as their core. The Labor policy on cash rebates of franking credits fails the fairness test.

Some facts about SMSFs

The following tables and charts, taken from the latest available ATO reports, disclose several interesting facts about SMSFs.

To begin, as at 30 June 2017, there were approximately 600,000 funds with assets under management of approximately $700 billion. As these funds commonly have more than one member, the ATO estimates that there are 1.1 million Australians that are members of SMSFs. As at June 2017, SMSFs made up to 99.6% of superannuation funds by number and held 30% of all superannuation assets in Australia.

Over the five years to 30 June 2017, growth in the number of SMSFs averaged almost 5% annually. 53% of SMSFs have been established for more than 10 years, and 16% have been established for three years or less.

Figure 1. SMSF population and assets – annual
Source. ATO

Over the last five years, the growth in SMSF assets has matched that of Industry Funds. Over one million Australians have decided that they should look after themselves in retirement and contrary to Labor’s claims, on average they are not massively wealthy people.

Figure 2. Growth of superannuation assets by fund type 2012-17
Source. ATO

The average SMSF member balance at 30 June 2016 was $599,000 and the median balance was $362,000, an increase of 26% and 32% respectively over the five years to 2016.  The average member balances for female and male members were $511,000 and $641,000 respectively.

It is a perverse outcome that the Labor Party’s proposal will hit females more harshly because they generally enter pension mode with lower balances than males. 

The chart below shows the average balances for SMSFs by age of members. It is to be expected that professional people that have saved/contributed for 30 years would have $1 million in their pension/super account. They could be compared with a member of the Commonwealth “non contributory pension scheme” (prior to 2005) who would have a tax payer funded indexed pension for life. The NPV of their pension stream would be millions of dollars more than the average balance of a self funded retiree (and that is an uncomfortable discussion that no one wants to have). The fact that the Future Fund is still $60 billion underfunded (even with $140 billion in assets) is an inconvenient truth for politicians.

Figure 3. 2016 Average and median taxable income and balance of SMSF members by age
Source. ATO

Over the five years to 2016, the proportion of members in SMSFs with balances of $200,000 or less decreased from 42% to 32% of all members. In 2016, most members had balances of between $200,001 and $1 million. Given their focus on saving for retirement, it can hardly be said that the average SMSF member is excessively rich – far from it. Further these trends are positive for SMSFs and society as they represent self-funded retirement outcomes.

Figure 4. Asset sizes, SMSF and SMSF member 2012-16
Source. ATO

Of SMSFs established over the last 10 years to 2016, 70% have not yet started making pension payments. Therefore, the majority of SMSF members will be discriminated against by Labor’s policy. In total about 53% of all SMSFs are in accumulation stage and the lucky ones under Labor’s policy will be those 47% already in pension stage.

Figure 5. SMSF payment phase
Source. ATO

There is a clear and discernible trend for members of new SMSFs to be from younger age groups. The median age of SMSF members of newly established funds in 2016 was 47 years, compared to 59 years for all SMSF members as at 30 June 2017. As families move through their childhood stage, the school fees decline, the mortgage is paid off and HECS payments have finished, they naturally think of retirement. The SMSF structure gives these people control over their future and transparency over their assets.

Figure 6. Proportion of SMSF members by age range 2012-16
Source. ATO

At 30 June 2017, 83% of SMSF members were 45 years or older. The average and median member age was 58 years and 59 years respectively. There were generally younger members in more recently established funds. Of SMSFs established in 2016, 75% of members were under 55 years old, compared to 65% of members of SMSFs established in 2012.

SMSFs are increasingly chosen by people that can look after themselves in retirement. The next table shows that the growth in members of both Industry and Retail funds are from those compelled to contribute to super at a young age. As people mature and have more savings, they tend to move to self-managed or directed schemes (if they can).

The sharp decline in “pension stage” members (over 60 years old) in non-SMSFs shows that member balances in Industry Funds are generally inadequate to meet the pension requirements of their members.

Figure 7. Age distribution of SMSF members and non-SMSF members as at June 2016
Source. ATO

It is an indictment of Australia’s superannuation system that over 75% of retirees still claim a full or part pension in retirement. Industry and retail funds generally manage funds for people that will never have enough to fund a secure or comfortable retirement, and the Labor policy seems designed to drive more people into this category.  The glossy advertisements of industry funds that portray retirement freedom for their members are far from reality. Indeed, for most retiring females their financial position is diabolical – more so if they are single.

Figure 8. Median super balance, by age and gender, 2014-15 financial year
Source. ATO

SMSF investments

The latest available asset allocation statistics from 2016 show that Australian      shares were not excessively held inside SMSFs. Thus while the benefits of franking cash credits are real, they are not excessively exploited or abused by the majority of SMSFs. The Labor party has manipulated the franking rebates utilised by a very small minority to justify their policy.

Figure 9. 2016 SMSF asset allocations
Source. ATO

SMSF benefit payments

For most SMSFs in pension mode, the payment of pensions is not excessive and does not suggest that the super-rich dominate this category. In 2016 the average benefit payment was $127,000, and the median payment $62,700. Our observation is that SMSFs in pension mode are working for those that utilise them.

In 2016, the main type of income stream benefit payment was for members 60 years and older. The average benefit payment per member increased each year, from $66,000 in 2012 to $76,000 in 2016. However, benefit payments as a proportion of the average member balance remained steady over the same period, at approximately 8% of the average member balance.

Figure 10. 2016 Average and median taxable income of SMSF members and non-SMSF members by age range
Source. ATO

The final chart is a snapshot of the position for the average Australian retiring in 2016. With just $197k in superannuation, the average retiree is hopelessly underfunded and thus a long-term burden on the Australian tax payer.

For many, a better option or solution (which does not currently exist) than the forced contribution to an Industry or Retail Fund would be a contribution to a national pension scheme into which everyone contributes. In that instance, the self-managed pension schemes have a legitimate role for people that can and should add to their pension entitlements. In that case, the Government would have to decide what would be a fair balance or a reasonable asset size to supplement a national pension scheme. The current debate and the national superannuation scheme is a long way from this and there is no solution in sight. The Labor policy does not even attempt to address the fundamental problem.

Figure 11. Financial Position of Intending Retirees in Next 12 months*
Source. Roy Morgan Research

44 Responses to “Frankly, this is unfair”

  1. Stephen Carthew says:

    Good analysis. Send it to Bill Shorten.
    The impotant thing is for SMSF with shares to invest in Australian companies. Franking credits ensure this.

  2. jeff hilmer says:

    if they go ahead as planned, they wont collect nearly as much as they are predicting.
    i would sell some shares eg the banks which are all much higher than cost. No tax payable on profits because in pension mode (and prior losses). sell enough to ensure no “excess franking credit”.
    then reinvest in a pooled fund (even an industry fund) and draw pension from it. would lose a little as outlined in the article due to sharing with accumulation funds and may change the mix, but Im sure appropriate funds will surface. ie will have separate pools for accumulation and pension funds. would be v difficult for ATO to relate each distribution and its franking component back to individual members.
    Still very unfair and cumbersome but wont solve labour’s revenue shortfall

  3. Trevor Russell says:

    If dividends paid by companies were made tax deductible (as is interest) the imputation system would be superfluous and all investors would be treated equally. This would also enable companies to pay higher dividends to offset the foregone franking credit.

  4. michael timewell says:

    Dear Clime management. Thanks for fighting on the behalf of all SMSF retirees.
    I trust this information will be given to the labour party so they can see they are hurting their own members and voters.
    I am angry at both political parties changing policy of the so called rich retirees who have struggled to better themselves and not be a burden by taking pensions and handouts.
    How can I help you and our fellow retirees to fight “the bastards” on this?

    • JOHN ABERNETHY says:

      Hi Michael,

      Thank you for your words of support.
      I think it is important that everyone that is generally affected by this continues to write and publish their concerns.

      There is a compromise that preserves franking for those that need it – a reasonable franking limit.

      Finally, The ALP needs to hear that it is more than a million “old” people whom are concerned by these changes. The children of the retirees will also be affected and we should seek their support in getting the message through.


  5. Ian Kilpatrick says:

    The article was very comprehensive. However, there were two other points that should be made:-
    1. Labor’s policy also catches elderly retirees who were too old to have been part of the superannuation system. My friend is 92 years old, downsized to generate some retirement cash as suggested via both political parties, inherited some shares and cash the result being she has more assets than the single person pension test. Her annual income is only just above the single person pension utilising the cash return from franking credits. Under Labors plan her income will drop below the single person pension.
    2. As part of the Coalition government tax changes they advised that to establish the “special value” of one’s lifetime pension or annuity the annual amount was to multiplied by 16 this is the equivalent of a 6.25% return. In the current market the best term deposit return is 2.6/7%. This equates to a multiplier of X 37. double the amount be used which would bring defined benefit pension receivers in line with SMSF pensioners.

    Finally, if Labor really want to “fix” franking credits and make the whole system fairer they should adopt the following:-

    1. As defined benefit pensions are usually guaranteed and index the “special value” multiplier should be set on the 30th June every year as 100 divided by the ten year Government bond rate. If this seems too harsh then the average of the big four bank 3 year term deposit rate could be used.
    2. To curb franking credit “misuse” all superannuation funds retail, industry, smsf and government should be required to segregate their accumulation accounts and pension accounts. This would insure there is no ability to avoid tax liability.

  6. Marlene Hall says:

    Excellent article. I will be disproportionately effected by Labor’s policy to no longer provide cash refunds for dividend imputation credits. After practically a lifetime of saving 1 earn $28,000 annually in dividends and approximately 10,000 in a cash refund. This represents the sum total of my annual income. I am a fully self funded retiree and receive no pension, my assets preclude this. I appreciate your article and hope that you are able to convince Labor to rethink it’s unfair policy. Yours truly Marlene.

  7. Don Fraser says:

    There is no doubt that they want to close SMSF and as I am on the border line and am not on a pension I will put my money into an Industry fund once this policy begins.
    I am already preparing to do this now.Frankly I do not care but the people in the finance or wealth industry should.

  8. Lewis Waters says:

    This proposal by Labor is the most discriminatory and unfair tax proposal ever devised by a political party. It will leave some taxpayers both inside and outside Super completely disadvantaged, whilst others who may indeed be financially better off as winners. Tax law must be fair and equitable and any attempt to push through discriminatory legislation must be rejected at all costs.

  9. Peter Turnbull says:

    Very well-constructed explanation of ALP policy to Imputation credit but it seems that many retirees who are not in a SMSF or an Industry Super Fund are ignored I am a self-funded retiree with a share portfolio compiled over many years Last Financial year I received an Imputation Credit of $3759.00 Now I am going to lose that I don’t qualify for any sort of pension so am totally excluded Peter Turnbull

    • Mick says:

      Many self funded retirees not even earning the equivalent of the pension are in exactly the same boat Peter. It is completely unfair and Shorten may want to reconsider rather than alienate people who support him. Not exactly as though retirees are a handful of voters.
      Shorten would do much better by setting the bar at income levels rather than making blanket calls which will hurt those who have sacrificed much so that they can self fund their retirements and not be a burden on the public purse. Bad bad politics which will likely come back to haunt him. PLEASE FIX!!!!

  10. Russell says:

    There have been suggestions to put a cap on tax credits, but there already is a cap with the income generated by $1.6 million in pension phase being tax free. if you have more than $1.6 million the income is taxed at 15% in accumulation or at your marginal tax rate in your own name.
    The other misconception is that the Tax Office is giving you money with excess imputation credits when the fact is they have taken it off you in the first place as a withholding tax before your dividend is paid. A fairer way would be to pay you a full dividend with the tax still attached and you pay the tax yourself according to the current rules which gives you tax free income in pension phase capped to that generated by your $1.6 million.

  11. Alex Harp says:

    Great piece and it explains even more clearly how unfair Labour’s intentions are. Helping their mates in the Industry funds is one thing, but placing even more retirees on the taxpayer account, is another. That will surely be the result. In addition, just what we needed – another poorly thought out change to Super rules, just after I fine tuned my account after the last lot. They also seem not to realise that, as a retiree, my yearly pension IS returned to the economy. i.e. If I don’t spend my compulsory allocated amount, I give it to the kids – and they do.

  12. David Heath says:

    But what can be done about it? No good just giving reasons. For example heavy advertising to indicate strongly to Labor that no self funded retiree or SMSF trustee would vote for them if these changes are seriously proposed. The changes are severe for many e.g. $70K per year in franked dividends gives a refund of around $30K per year which goes to zero under the Labor plan. Have taken this example because $100K in total income is the limit before the $1.6m cap takes effect (x16 multiple). Also can we somehow get the Liberals to commit to repeal the legislation – fully – if introduced?

  13. Barry Goldman says:

    A great article. Very informative. It supports some of the thoughts I was having and I think I understand some of it – but the issue is so complex I’ll have to read it a few times more yet. The mind boggles over the complexity of Australia’s tax and superannuation systems.

  14. Bob Jones says:

    Pensioners have fixed asset that gives a reasonably predictable return. To arbitrarily change that overnight is unnecessarily savage on lots of pensioners
    If a change has to happen, it should be gradually introduced so pensioners can adjust lifestyles.

  15. Graham Jenzen says:

    Your article on franking credits says in one part that SMSF where member not receiving pension will never be able to receive rebates. Did you mean CASH rebate/refund as I thought credits would still b able to be offset against income ? Thanks

    • JOHN ABERNETHY says:

      Thanks Graham,
      The answer to your question is difficult. Many tax experts that I have approached have answered that there is simply too little information in the media release to be certain. A disgraceful situation given that people’s livelihood is at risk.
      However, it appears to me that the cash rebate will go but the franking credit will remain. The real benefit is the cash rebate for a pension fund and that is mainly lost. Outside super/pension the rebate seems to continue to offset tax payable – but that depends on the ALP not changing the rules again.

  16. Ericv Deshon says:

    This is a great appraisal. We have a SMSF and am most concerned with what Labor is talking about especially as their ‘industry funds’ will get off free. They want control over the industry.
    Eric Deshon

  17. Rob says:

    An interesting and valuable analysis. As I understand it, when paying tax, imputation credits are included in the assessment of the total income on which tax is owed, often bumping taxpayers up to a higher level and certainly taking more from them than they would pay were the imnputation credits not included. At present those credits are returned. Will this absurd new policy mean that some taxpayers will be forced to pay tax on a fictitiously large alleged income when a portion of that – the imputation credits – will and can never be part of what they actually receive? If so, will not the same apply to the medicare levy, which (I understand) is also levied against the income that includes these credits which, in future, the taxpayer will never receive?

  18. Helen Scarborough says:

    To all SMSF Trustees and members –
    All of the above need to be made aware of these facts and figures.
    Even if you do not like or agree with our P.M. Please do not vote for the Labour Party !

  19. Paul B says:

    Great report, but you don’t need a bunch of statistics and graphs to realise, why any Australian would want to vote Bill Shorten, and the short-brained, short-sighted, left-winged, bumbling Labor Party, to Govern this country. I know we have a meek, rich, out-of-touch prime minister. But for God’s sake Australia, let’s wake up to what awaits us, if Labor and the Shorten buffoons get in. What a train wreck awaits us. Imputation Credit changes is the tip of the iceberg! Capital and business investment will suffer greatly. Not to mention business confidence which is only just improving. What’s next? Remove Negative Gearing; introduce Death taxes; Company Tax 50%; …. Tax the sunlight maybe?

  20. Tim Playne says:

    I find this latest fantasy by Bill Shorten as an typical attack on a very small percentage of retirees who are in a position to exploit dividend credits, although what they do is legal. The majority are hard working Australians who have lived within their means and saved for their retirement. I am 83 and have never drawn a pension from the Government which means I have saved the Taxpayer many thousands of pension dollars. We are about the median group in your charts in the foregoing article and live a moderate lifestyle and hope to self funded until the end. Please continue to put pressure on the government and opposition regarding this ill thought out proposal as the Australian Shareholders Association is also doing. Thank You.

    • Leigh Kealton says:

      I look forward to seeing what the Australian Shareholders Association are actually doing on this. Media releases are not enough. They need to be put under pressure to really step up to ‘Stand up for shareholders’ and not pay lip service on this. I think Clime is doing a better job!

  21. Mike says:

    I am confused by your comment that SMSFs in pension mode are the lucky ones in respect of the proposed Labour Party changes to dividend imputation. Can you please clarify?

    • JOHN ABERNETHY says:

      Hi Mike,

      Yes a bit cryptic. Our point is that established pension funds have had the benefit of cash rebates for 19 years and this has certainly helped them grow or maintain capital inside their fund.

      Accumulation or recent pension funds have not had the same benefit – which also reflects in compound returns.

      Thus, established pension funds are (relatively) lucky and everyone else – bad luck!

      Kind regards

  22. Jan Brown says:

    Thank you very much indeed for your insightful articles recently about the ALP proposed policy on the removal of franking credit refunds. The articles are well balanced and detailed and describe our situation.
    One additional comment is that it is unfair to change the rules. We made our decision to retire when we did because we calculated, with advice, that we could afford to because our total estimated income and growth of income would include 30% coming from franking credit refunds. This was the rule of law at that time. It was not, and is not, a rort, as Shorten and others have described it.
    It is unfair to change the basis on which people much such a life changing decision as retirement. There will be lots of people who have recently retired on the basis of including the refund in their estimated income, but who, if they knew this law would be randomly changed, would have stayed in the workforce. They can hardly go back to work now. We would have delayed retirement had we known. We are now in our seventies and looking to have to sell our house and move somewhere really cheap so as to raise the capital to invest in shares in order to supplement our SMSF to compensate for the lost income. Not fair and I am sure we are not alone.
    But – the most important point of all – you are publishing these great articles. How do you know that Shorten and Bowen are listening? How do they get hard-hitting exposure to the sorts of articles that you write?
    Keep up the excellent work. But the perpetrators need to hear it as loudly as the victims.
    Thank you
    Jan Brown

  23. henry bennett says:

    as a retired financial planner, the general talk at the time of the Howard Govt. cash return of impetrated credit, capital gains tax liability being nil on conversion from pension phase and zero earnings tax was too good to be true, particulary for SMSF which were not in any big numbers. You could say we had it very good for over 10 years, and even if labour get into power the pension phase will still be good thing.

    I believe a better approach would be to have a much needed tax discussion in a mature and senseable way, some control of the outcome may then be obtained. Giving a small concession may in the long rum be good for all.

  24. David L. White says:

    A great article – so well researched and focuses on the gross unfairness of the ALP policy. Slams self funded retirees funding their own retirement according to government legislation, absorbing costs to establish and service SMSFs, absorbing fluctuations in markets. And now dealing with sovereign risk being back dated – cannot defend against such a threat. Treating us as a blight on society. Wrote to Federal MPs Jenny Macklin and Richard Marles who, despite my several reminders (Macklin refused, saying I was in Marles’ seat!) have not given me a reply.

  25. John Ovens says:

    Brilliant – it is a pity that the Labor Party did not consult with Clime before announcing their ridiculous and divisive policy.

  26. d brown says:

    My wife and I have assets that are just above the limit set to receive a centrelink pension.To obtain a reasonable income we have one third of our portfolio in blue chip shares generating about $8000 in franking credits and about $20000 in dividends.The balance is taken from our allocated pension ,around $30000 pa and gives us about $29000 pa each to live on.To maintain our $58000 we will,if Shorten gets elected, need to draw about $10000 more p.a. from Allocated Pension .It wont be long before our private pension is replaced with a tax payer funded Centrelink Pension.(but we wont be able to claim our franking credits)
    This policy is a disaster for couples like us who have modest retirement packages and currently just miss out on a centrelink pension.
    My friend has similar assets but qualifies for a small gov,pension.He and his wife can keep their franking credits and with his private and Centrelink Pension will be a mile better off than us.
    I think I would rather pay tax on my meagre $28000 and keep my Franking Credits.

  27. Allan says:

    There has been a lot of talk about those in or approaching retirement in relation to this proposed policy. What isn’t often highlighted is the unfairness across the board.

    I know a young couple saving hard over the long term to accumulate a home deposit. One works and the other studies. In accordance with widely accepted basic financial principles, they have a portion of their modest savings invested in Australian share holding listed investment companies paying fully franked dividends.

    As I understand it, if this policy gets up, this student will effectively pay a 30% flat tax rate on the dividends. This is similar to the average tax rate incurred by a top marginal tax rate taxpayer earning 180k plus.

    Likewise, a young person (presumably no subject to the proposed relief for pensioners) who has inherited 10k of bank shares from a deceased relative will pay an effective flat 30% on the fully franked dividends. Meanwhile another “trust fund” takes full advantage of the progressive income tax rates. Indeed, at current savings account interest rates, a person could have around 600k plus in cash and pay nothing on the interest while holding 60x the capital that the 10k shareholder does.

    One could go on and on.

    These scenarios and others wouldn’t be so offensive if the impact was equal across the board. Yet anyone earning over 37k in taxable earnings could receive the full benefit of the franking credit as a discount against their income tax rate.

    This is utter insanity and incredibly unfair, but is being lost on many as the imputation system seems to be poorly understood by most.

    It is a real concern if Labor genuinely don’t understand the implications of this. If they do, and are opting to take advantage of inter-generational tensions for their own political ends, then it is equally or more concerning. Either way, it is poorly thought out policy which is unlikely to have the desired effect, will add complexity to an already complex system, distort behaviours, and be used to fund future promises before any actual revenue gains are realised.

    This is exactly the sort of garbage policy we don’t need more of.

  28. Kevin Latta says:

    Franking Credits represent tax deducted from the income of the owner or owners of a company. PAYGE tax is tax deducted from the income of a company employee. At Tax time Gross income = Cash Received + Tax Deducted. The ATO treat Franking credits as income in exactly the same way as they treat PAYGE tax deduction, therefore the ATO are in no doubt that the shareholder payed the tax attached to the Franking Credit. Therefore – A – Bill Shorten and Chris Bowen are deliberately making a false statement when they say the shareholder did not pay the tax therefore they are not entitled to a refund. The alternative – B – is that Bill Shorten and Chris Bowen simply don’t understand how the Australian Tax and Financial system works and therefore lack the basic skills, to be Prime Minister and Treasurer post 2019 . I am not sure if the correct answer is A OR B

  29. Duro Margaretic says:

    Excellent article. I was confused however with reference to 26th March 2018 for those who are receiving a “government” pension prior to that time and then later in article talking about this date and SMSF structures. What is situation with a SMSF which is in a “transition to retirement” mode at that date ?

  30. David Harvey says:

    The PAYG taxpayer gets payments on which tax has been paid. If at the end of the FY less tax is owed than has been paid, the excess tax is refunded.
    The investor gets payments on which tax has been paid. If at the end of the FY less tax is owed than has been paid, the excess tax SHOULD BE refunded.

  31. Peter M. Wargent says:

    Doesn’t matter what the rules are as long as they apply to everyone. Repeat, everyone.

    That includes politicians, public servants,and last but not least, all unions and their affiliated entities.

    I’m afraid Bill Shorten and his ilk will choke on this (but that doesn’t bother me much).

  32. Stewart Marney says:

    For those SMSF members who are considering going into an Industry or Retail super fund you should be aware that in these funds you do not get the direct benefit of any franking credits your funds generate .All assets are owned by the fund manager and all the credits are pooled and used to negate the pooled tax liability . If you are in pension phase you do not have any tax liability so you lose all your franking credits . They are not refunded to your account .
    Also the fees in these funds amount to 20% to 25% of the actual income that you earn . Income is rent , dividends , interest received etc. . Capital gain is not income and is just a function of the market and can not be attributed to the manager especially as they are invariably just index huggers . One million dollars in a balanced fund will earn 4% to 5% income – $40,000.00 to $50,000.00 . The fees will be 1% of the total fund value – $10,000.00

  33. Leigh Kealton says:

    I would be happy with a cap on franking credits as soon as my gross income is the same as the Leader of the Opposition. At what stage are we considered wealthy? We have worked hard, saved hard, invested wisely in Australian companies and deserve to enjoy the fruits of our endeavours, whilst keeping off the public purse. Shareholders need to mobilise and ensure this wealthy hypocrite never runs the country.

  34. Bill Guthrie says:

    A great article-with well researched data.
    The bottom line is that this is the usual policy on the run by politicians who have not only lost touch but more importantly are taking away major benefits from hundreds of thousands of people who have relied on consistent policies to properly plan for their retirement AND AT THE SAME TIME THESE SAME PEOPLE ARE STILL LINING THEIR OWN POCKETS WITH FAR SUPERIOR SUPERANNUATION SCHEMES (eg taxpayer funded contributions and deferred benefits schemes to name a couple) as well as OTHER PERKS AND INAPPROPRIATE TRAVEL TRIPS.
    As your article points out very articulately, the policy is also very biased and discriminatory (eg disadvantaged SMSF v the advantaged Industry and retail funds)
    I say ENOUGH IS ENOUGH, however SMSF’s are individually owned schemes and therefore it is much more difficult to get mass communication.
    Is there support out there for all the people affected by these policies to get a “movement” going to stop this abuse of power – and how do we get the support of influential people that are “in the know” to assist in this process.
    Thank you for listening – this is the first time that I have ever aired my views in public – but perhaps not the last

  35. Garry taylor says:

    Good article which confirms what I had already deduced. As a self funded retiree who will never be a burden on society, I can’t believe the recent ALP proposal. Add it to negative gearing plans, capital gains tax chatter it is clear to me that the ALP has declared ‘open season’ on any person who has tried (or wants to try) to make an effort to be self reliant, taking away incentive (and ability) to be self sufficient. And what comes next ? The solution…leave the system alone. There has already been too many changes recently and confidence in the Superannuation system is being eroded. Under Shorten’s proposal franking credits will be
    absolutely useless to me and many others in my position while other cohorts will still maintain full advantage of franking credits and cash refunds of same. That is fundamentally unfair. I wish some journalist or similar would contrast to the public the magnificently generous retirement arrangements afforded to our Politicians while they ‘nickle and dime’ the responsible masses, most of whom like myself are not wealthy. To me it is very simple. Money is being taken out of peoples pockets to pay for political dreams and balance the books because they can’t do there jobs properly. Unfortunately our current crop of Political leaders leave us with a choice of ‘bad’ or potentially next year ‘dangerous’. Cheers

  36. Glenn says:

    Bill Shorten does not have a clue about super .All industry & retail super funds are already broken up into accumulation and pension funds ( look at your statements properly) so how hard will it be to stop franking credits to pension funds and make a true level playing field compared to SMSF’s. Shorten proves how ill informed he is ,a person with $250000 in super and full pension will be far better off than a person who saved for retirement and has $600000 in super and no pension(you really will need a $1000000 to retire comfortably). Be wary of killing off your SMSF and going to an industry or retail fund as you will loose the grandfather effect with regards to deeming . If Shorten gets in go out and spend spend spend and claim the pension.

  37. Robert M. says:

    When capital gains tax was introduced back in 1985, “grandfathering” provisions were also brought in to acknowledge that previous decisions relating to the setup of a person’s financial future were accepted and respected. Surely, the same situation should occur with respect to cash rebateing franking credits. Many thousands of people who have commenced their own SMSF’s have done so within the law and legislation at the time which allowed the cash return of franking credits. This cash return was/is an integral part of their future income during retirement. To suddenly reverse this policy is at best totally unfair and at worst, catastrophic to those who rely on the cash return of franking credits to fund their lifestyles. The Shorten/Bowen tax theft is a disgrace however there MUST be granfathering provisions introduced if, perish the thought, Labor gets into power.

  38. Kate says:

    Yeah, truly unfair…just look at the figures..

  39. Graeme McFarlane says:

    yes,we have a shambolic “system” thanks to governments especially Howard’s complicating something that was reasonably straightforward originally.He gave advantages to SMSFs and other groups. Perhaps his greatest perversion was the plan for anyone with a SMSF to deposit $1,000,000 without paying the 15% deposit tax. He also cancelled the payment of the departure tax. When I retired, I paid the full tax on the amount received.

    Howard wasted much of the revenue from the super mining boom on rewarding friends, but now hat the huge revenues have dried up, the current government and future ones cannot afford the largesse. The system has now become unaffordable and as one of your correspondents pointed out people had it so good for 10 years or more,so ride with any future developments.

    [Incidentally, the Shorten proposal is just that… a proposal and we are some months out from the election as far as we know; it belongs with similar garbage espoused by Scott Morrison]
    A very salient thought re taxation… from federation in 1900 to 1996 Howard becoming P.M. there was approx 1000 pages of taxation legislation; from 1996 to 2007 when he left office another 1000 pages had been created and most of them involved making the system more and more UNFAIR and UNEQUAL.

    To hear those who have benefitted so well and for so long from these distortions now whining about “being robbed” I find more than a little hypocritical! Incidentally I can’t stand Bill Shorten who may single-handedly ensure that Turnbull scrapes back as PM.

    Oh what a choice !!!!!

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