Confused about Bill Shorten’s tax grab? Take a few minutes to read my little essay.
𝘕𝘰𝘵𝘦: 𝘛𝘩𝘪𝘴 𝘪𝘴 𝘱𝘶𝘳𝘦𝘭𝘺 𝘢 𝘵𝘩𝘦𝘰𝘳𝘦𝘵𝘪𝘤𝘢𝘭 𝘦𝘹𝘦𝘳𝘤𝘪𝘴𝘦 𝘢𝘯𝘥 𝘪𝘴 𝘥𝘦𝘧𝘪𝘯𝘪𝘵𝘦𝘭𝘺 𝘯𝘰𝘵 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘢𝘥𝘷𝘪𝘤𝘦 𝘪𝘯 𝘢𝘯𝘺 𝘧𝘰𝘳𝘮 𝘢𝘴 𝘵𝘩𝘦 𝘢𝘶𝘵𝘩𝘰𝘳 𝘩𝘢𝘴 𝘯𝘰 𝘲𝘶𝘢𝘭𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯𝘴 𝘪𝘯 𝘵𝘩𝘢𝘵 𝘢r𝘦𝘢.
𝐁𝐢𝐥𝐥 (𝐭𝐡𝐞 𝐛𝐚𝐧𝐝𝐢𝐭) 𝐒𝐡𝐨𝐫𝐭𝐞𝐧 𝐦𝐚𝐧𝐚𝐠𝐞𝐬 𝐭𝐨 𝐜𝐫𝐚𝐬𝐡 𝐭𝐡𝐞 𝐬𝐭𝐨𝐜𝐤𝐦𝐚𝐫𝐤𝐞𝐭, 𝐛𝐮𝐬𝐭 𝐭𝐫𝐞𝐚𝐬𝐮𝐫𝐲, 𝐚𝐧𝐝 𝐝𝐫𝐢𝐯𝐞 𝐮𝐩 𝐭𝐡𝐞 𝐜𝐨𝐬𝐭 𝐨𝐟 𝐡𝐨𝐮𝐬𝐢𝐧𝐠 𝐚𝐥𝐥 𝐢𝐧 𝐨𝐧𝐞 𝐟𝐞𝐥𝐥 𝐬𝐰𝐨𝐨𝐩.
I’ve spoken to a number of people about the recently announced policy decision by the opposition Labor Party to scrap franking credit refunds should they win government. I’ve been struck by the fact that none of the people I spoke seemed to fully understand franking credits or the possible implications of such a decision. Of course they had been getting their news from the mainstream media and this news has been, as usual, a mixed up mess of half-truths and downright misinformation. I’ve seen figures of people being worse off by everything from $1200 to $5,000 to 2.5 million so I have set out below a case example for what I would think would be something like an average self-funded retiree couple living off a pension payed from their Self Managed Super Fund (SMSF). The couple have both reached pension age and therefore their SMSF earnings are tax-free. I have simplified the case somewhat for the sake of the exercise.
The theoretical couple has $850,000 in a SMSF which is 100% invested in listed Australian company shares. These shares all pay fully franked dividends i.e. dividends which have been distributed from company profits after company tax of 30% has been paid. To avoid double taxation the couple are entitled to a cash refund of the franking credits. The companies have an average dividend yield of 5%.
The couple’s income is therefore $42,500 as dividends per annum plus franking credits of $18,214 which is refunded to them when their tax return is submitted and approved as they have reached retirement age and don’t pay tax. They therefore have a total income of $60,714. They receive no money from the government and are therefore no burden to the taxpayer. And it is actually considerably worse than this as the couple have to pay substantial accountancy and SMSF compliance fees.
Bill Shorten and his band of merry men intend to take the $18,214 for themselves leaving the retired couple with just $42,500 – they have lost not $1200, not $5,000, but $18,214 in income. Not only that, but their remaining income relies on returns from relatively risky investments – for instance, during and after the GFC many people saw share income drop by as much as 50%.
But hang on! The old age pension for a couple is $35,048 per year, is guaranteed, and goes up every year. What’s more they would get many more concessional benefits. Why the hell be in a risky position of relying on the stock market for a few extra (maybe) bucks?
What could they do? Let’s assume they own their house and it’s worth $450,000 after selling expenses; well they could theoretically take the following action.
Sell all their shares and wind up their super.
Sell the house.
They now have $1.3 million.
Keep $380,000 in cash (you’ll find out why soon.)
Go on a cruise and spend $50,000 – that leaves $870,000
Buy a house for $870,000 all up (This is bound to happen and thus put more upward pressure on house prices – watch real-estate companies support the move.)
Invest the $380,000 in fixed term deposit at 2.4% interest
Now apply for the full aged pension – they will qualify as the house is exempt from the assets test, they are allowed up to $380,000 in assets – that’s the money in the bank. They are allowed up to $150 earnings per week without it affecting their pension and that is the interest from their term deposit. (A little bit of juggling with this cash investment is needed here, but you get my drift.)
Result: Their income now is $42,848 – slightly more than they would be making if they were to continue as self-funded retirees under a Labor Regime. They no longer provide fully for themselves – they are now a burden on the taxpayer. (But who could blame them?) They have less money to spend so less of their money circulates – the Labor government has the money now and we all know what that means, and it’s not that they will spend it wisely; there will be more vote buying, pork barrelling, and waste.
As I stated previously this example probably represents, at least to some extent, a lot of the SMSF retirees. Some will have more and some will have less. The mix of dividends and other forms of income will vary – not all will have only dividend income so their losses will be less. The few very rich will no doubt have income from outside their super funds and will still be able to offset franking credits against tax due on this income – this is a hit on middle Australia, not on the rich.
Of course there is another side to the story – I doubt that many self-funded retirees vote Labor, but reduce them to just old aged pensioners dependent on the State, and well – why not?
D. N. O’Brien