The Superannuation Battle
Treasurer Josh Frydenberg has been on a campaign to swing retirees against Labor by attacking what he describes as the “retiree tax.”
This picks up a crusade by fund manager Geoff Wilson to undermine the Labor policy on dividend imputation which aims to abolish cash refunds to shareholders who receive franking credits but do not pay tax against which the franking credits can be offset.
Shadow Treasurer Chris Bowen says that the payment of cash refunds is an aberration that costs the budget $5 billion a year.
In an op-ed piece for ‘The Australian Financial Review’ on Monday, Mr Bowen wrote: “Labor will return dividend imputation to its original design, as envisaged by Paul Keating. Australia is the only country in the world which provides a refund for corporate tax paid to shareholders if they don’t pay income tax. It’s a $5 billion a year anomaly that must be fixed in the interest of budget responsibility.”
It’s worth pointing out here that there are only four countries in the world that have dividend imputation and the others have different taxation systems to Australia with different tax free thresholds.
Moreover no other country has a superannuation system like Australia so the question of cash refunds to self managed superannuation funds does not arise.
The Shadow Treasurer makes a strong case for ending the cash refunds:“Distributional analysis has shown that, for people of retirement age, more than 80 per cent of the benefit of imputation refundability goes to the wealthiest 20 per cent of households. Analysis from the PBO shows that for self-managed superfunds, more than half of all cash refunds accrue to people with balances over $2.4 million. To use taxable income figures, as these people do, is just fundamentally dishonest: our highly concessional treatment of superannuation means people can be of significant wealth and still have no or little taxable income,” he argues.
The strongest attack on the Labor proposal has come from Robert Gottliebsen.
In an article published in ‘The Australian’ on March 13, just after the Labor policy was released, he wrote: “Under the Peter Costello rules, superannuation funds in pension mode were tax-free. The current Coalition government limited the tax-free portion to $1.6 million and introduced other nasties to attack retirees. One of those nasties encouraged people with in the vicinity of between $400,000 and $800,000 in assets to liquidate part of those assets and go on the government pension. They received a 7.8 per cent return on assets liquidated. Cruises have boomed thanks partly to the Coalition. It was stupid policy but the Coalition attitude was: ‘Who cares? Self-funded retirees don’t carry enough votes and the increased eventual pension bill will be met by a future government.’ However Coalition policy encouraged retirees to invest that $1.6 million tax-free money in shares, particularly those that paid franked dividends. Now the ALP says that that those $1.6 million tax-free funds will not be able to claim franked credits, substantially lowering the value to self-funded retirees of banks and other securities that pay high franked dividends. Many bank hybrids are among those to be affected. That means if your superannuation fund is paying tax, ie not in retirement mode, you can claim franking credits but if it is in retirement mode (or not paying tax because of large volumes of franking credits) then the fund can’t claim the benefit of those credits. This is clear discrimination.”
There are strong public policy arguments both ways but there’s no doubt that Labor measures are unpopular with retirees.
Geoff Wilson has started a petition against them, which is gathering support.
This may not matter if the changes realise the $5 billion that Chris Bowen says will go to the budget bottom line but, if the money is not there, then the policy will simply be seen as punishing retirees because of status envy.
The answer to this question will not be known until the end of this financial year when the value of the cash refunds, taking into account the tax rearrangements made to accommodate the Labor policy, will be known.
Robert Gottliebsen doubts that the savings will be very large.
He argues that Labor can’t commence the new system until July 1 2019 by which time most high wealth individuals will have rebalanced their portfolios.
Many of them will reduce the value of their assets so they are eligible for a part pension which will exempt them from the measures.
Others are likely to move their superannuation into industry or retail funds so that they also gain an exemption.
He says that the group that will take the biggest hit will be people with self-managed superannuation funds in the pension mode.
Because of changes to the rules that capped superannuation to a balance of $1.6 million many retirees put the overflow into shares with big franking credits.
These people stand to lose a considerable portion of their income but whether the saving will be enough to make a meaningful contribution to the budget bottom line is still open to question.
Investment adviser, Marcus Padley, thinks that the Labor measures may not be implemented in their current form.
As the election approaches and Chris Bowen realises that he stands to lose the votes of 660,000 self-funded retirees he will probably modify the policy.
This will reduce the impact on the budget and there would have to be a point where modifying the policy is no longer worth it.
Labor has said that it intends to implement the policy on July 1 2020 which gives retirees plenty of time to restructure their affairs.
In the meantime many big companies may follow BHP’s example and distribute all their withheld franking credits to their shareholders.
This will give plenty of retirees a lump sum tax free that will help ease the pain.
In the end the attack on franking credits reveals the futility of Labor’s attacks on the ‘wealthy’.
The truth is that the truly wealthy can always organise their affairs to maximise advantage under whatever taxation regime exists.
It is invariably those people who are barely self-sustaining on modest incomes who get it in the neck.