Discussion on Labor’s Franking Credit proposals

Discussion on Labor’s Franking Credit proposals

This discussion is directed solely towards those people who are fully retired and have a self-managed super fund (SMSF) as their sole source of income. There are approximately 1500 retirees living in Eurobodalla who will be affected.

A short history:

Superannuation was encouraged by the Hawke, Keating and Howard Governments as a means whereby workers could set aside income and when they retired they would not be ‘living off the public purse’. Many people heeded that advice and put money into their own funds, especially tradies, self-employed and small business owners who had no employer sponsored superannuation.

In 2001 the Government announced that those in ‘full’ retirement mode would receive the ‘franking credit’ or tax component of the total benefit paid by a company as a refund. Some say it was an election bribe, however there was also a motive that there was a poor takeup of Australian shares by these funds as interest rates up till this point had been as high as 16%. Put a million dollars into a bank at 16%, receive $160,000 per year. Dividends paid by banks at the time were in the order of 5 to 6%.

Over the next 15 years through both the Rudd/Gillard/Abbott and Turnbull years this situation prevailed until January 2017.

In January 2017 the assets test for receipt of a part pension was heavily reduced.

In the case of a couple with assets of nearly $1.1 million to less than $800K.

As well the maximum assets able to be held by a couple in a super fund was reduced to $3.2million. This was a measure to reduce the effect of franking credit refunds.

This meant that 300,000 part pensioners had their entitlement reduced and 150,000 lost their part pension entitlements completely.

This loss meant that reduced services costs and the Health care card were no longer available. These concessions were probably worth about $2,500 per couple per year.

Franking credit refunds were retained.

Then in March 2018 a major upheaval was announced by Mr Shorten and Bowen. Franking credit refunds were to be abolished for those who paid no tax. This caused an uproar and it wasn’t long before they backflipped in part and stated ‘those retirees who were full or part pensioners prior to March 2018 will still receive them’. Their mantra was ‘we protect pensioners’. They forgot about those who were just above the part pension cut-off point.

Who will it affect?

  • ALL retirees whose source of income is from an SMSF with Australian shares and who were NOT full or part pensioners in March 2018.

  • ALL workers whose tax payable is below the level of franking credits they would have received from a small share portfolio.

  • Because of the reduction ‘spending capacity’ of the disadvantaged retirees local communities, especially in ‘retirement areas’ such as the south coast of NSW will be affected. A conservative estimate for Eurobodalla would be $10 million per year.

Who will it affect the most?

  • The Shorten/Bowen mythology is that all SMSF have mega millions of Australian shares in their assets. However the reality is the majority of SMSF sit just above the part pension assets test (couple = $850K) and are owned by ‘Mum and Dad investors.

  • These retirees who sit just above the part pension limit have NO benefits from being on a part pension such as the health care card, reduced household rates and car registration.

  • In all cases where the SMSF has Australian shares as the major source of income then those fully retired will see a reduction in their SMSF income of up to 25%.

The flaw in Shorten’s argument

  • A shareholder is a part-owner of a publicly listed company.

  • Income is earnt in the company on behalf of individual shareholders. Dividends are a portion of the profit paid to an individual shareholder, depending on the number of shares held. Tax is paid on behalf of the shareholder at a rate of 30% and forwarded to the ATO.

  • In the shareholders hands if their marginal rate of tax is greater than 30% then they will pay tax on top of that already paid by the company.

  • Shorten will still keep this provision above

  • If a shareholder’s marginal rate of tax is 0%, that is in retirement mode with an SMSF does it not seem equitable that the tax this person has been overpaid should be returned?

What will be the unintended consequences in Eden Monaro?

  • One doesn’t need to be an economist or even Dr. Kelly to realise that the south coast of Eden-Monaro does not have a surplus of multi-millionaire retirees who are ‘rorting’ the system. Why isn’t Dr. Kelly supporting them?

  • A franking credit rebate to retirees is spent in the community in the vast majority of cases. Donations to local clubs and organizations, such as the Montague choristers and local charities will inevitably be affected.

  • For any retired folk living on a modest SMSF, after all the expenses are paid, such as food, electricity, rates and car expenses, then anything else is spent locally.

  • It would be inevitable that over time many retirees affected will have to eat into their capital, which ultimately will lead to them becoming eligible for the part pension and receiving ‘taxpayer funds’

Why it’s unfair.

  • A couple in a full retirement can get a full or part pension in several ways:

  • They can have absolutely no assets. In which case they would receive in the order of $35K per year.

  • They can have up to $300,000 in assets, even in an SMSF. This $300K is ‘deemed’ to have earnt $7,100. They can earn up to $7,000 per year and not lose their full pension.

However the $300K in an SMSF could earn as much as $18K and it doesn’t reduce the couple’s pension.

  • Part pension. Can have up to $850K in assets and earn up to $80,000 per year before they lose their part pension entitlement.

So this means one of a couple could earn say $30k/year from a Government or industry sponsored pension and receive up to $47K from their super fund. They satisfy the assets test and the income test.

  • The issue with an SMSF and a couple who have no other assets is they will lose the franking credit component. With, say, $900K in an SMSF they will NEVER be able to earn $80,000 per year.

Misleading and derogatory statements

  • Made by Shorten, Bowen and our local member Dr. Kelly:

  • “Franking credits are a GIFT from Australian taxpayers to retirees’.

This sneering statement forgets that the Newstart allowance, baby bonus and indeed the Old age pension are somehow NOT gifts? This beggars belief.

  • “We can’t afford to have wealthy baby boomers, sitting on their millions rorting the system”.

And yet the majority of SMSF have accumulated funds to allow people to retire on an income that is generally regarded as suitable for a ‘comfortable lifestyle’. This happened because for 30 + years they scrimped and saved money and often had an uncomfortable lifestyle.

  • “It will cost the economy $50billion over 10 years”.

This is misleading. The calculation was made based on the franking credit removal to ALL retirees. When Shorten and Bowen backflipped on current age pensioner recipients, it almost halved their alleged ‘cost’ to the economy.

If the cost to the economy will be so great, why can the coalition manage the economy to return the budget to surplus for 2019/20 PLUS retain franking credit returns?