In March 2018, the Australian Labor Party announced its policy to stop imputation credit refunds allowing cash refunds for excess franking credits. This policy will become effective from July 1, 2019 should a Labor Government be formed following the next Federal election.
Gold Coast Retirees Inc. believes this policy is: UNFAIR, DISCRIMINATORY AND UN-AUSTRALIAN
At the press conference, in which Labor announced their new policy and in the subsequent televised right of reply to the Federal Budget, delivered on Thursday, May 10, 2018 the Leader of the Opposition stated:
That millions of dollars in franking credits are being unfairly claimed by wealthy members of large self-managed superannuation funds.
This is simply untrue: Until July 2017, self-managed superannuation funds were able to hold all of their money in a tax-free pension mode and thus receive a full refund of all franking credits. However, the Turnbull Government amended the rules for self-managed superannuation funds and from July 2017, SMSFs were restricted to holding a maximum of $1.6 million per member in pension mode. The value of imputation credits refunded has already been significantly reduced. Income derived from SMSF assets in excess of $1.6 million per member will be taxed at 15% pa.
Latest costings from the Parliamentary Budget Office indicate that ‘less than five self-managed super funds claimed more than $2.5 million in refundable franking credits in 2014/5. There could now be only one fund in the country with an investment portfolio capable of generating a cash refund in the order of $2.5 million. The figure of $2.5 million was used repeatedly when Labor announced the new policy.
The Opposition Treasury spokesman promised that the vast savings to be made by clawing back payment of these franking credits will be sufficient to fund generous tax deductions for millions of average workers and expenditure initiatives promised for hospitals, TAFE training and capital works programs.
This is also untrue: If the revenue stream anticipated by Labor fails to eventuate, and most respected financial commentators believe this to be the case, Labor’s promised expenditure programs will be substantially un-funded. To deliver on their promises, Labor will be required to increase taxes, rather than reducing them.
Wealthy investors with large portfolios of Australian shares paying franked dividends will also be captured within this policy.
Those who restricted their investments to Australian shares yielding franked dividends, and there are tens of thousands involved, will be severely punished by the proposed policy as they will have no other income producing assets against which they can offset their franking credits. They stand to lose thousands of dollars in refunds of tax already paid; tax which is rightfully theirs.
Australians have been encouraged by governments over the past 40 years to provide for their retirement years, either by way of compulsory and/or voluntary superannuation contributions, or through the accumulation of other income producing assets, usually in the form of ‘blue chip’ Australian shares, or by way of property investments. They have planned their retirement strategies under existing rules. To change the rules now that they have reached, or are approaching retirement age is simply unfair.
The A.L.P. policy announcement stated that those with their money invested in retail and industry superannuation funds will not be affected by the proposed changes.
If large retail funds and union controlled industry funds are treated as individual organisations, as opposed to a collection of individual members, they will receive substantial taxation deductions that easily offset the value of franking credits receive. People with SMSFs will not have the operating overheads and thus will not be able to offset their franking credits. People with SMSFs are more vulnerable and may simply chose to roll their SMSFs into retail or industry funds where the franked dividends are protected. In effect, the ALP policy is a massive campaign to destroy large sectors of the self-managed super fund industry and a clear attack on the right of Australians to manage their own assets in their retirement. This is grossly un-Australian!
Grandfathering provisions: Following wide scale criticism of Labor’s proposed policy by the financial media at the time of its announcement, the proposed policy was subsequently amended to protect franking credits received by pensioners and part-pensioners.
This is discriminatory: The basis on which this amendment was made is flawed and unworkable. Shorten stated that low-income shareholders, those who already pay little or no tax as their income is already less than the cut-off figure of $ 18,200 pa, will still receive a refund of franking credits, providing their shares were purchased prior to March, 2018. This is discriminatory! Those who have already purchased shares will be entitled to a refund of franking credits while those who are still purchasing shares to provide a retirement income will be excluded from receiving franked credits. The policy creates two classes of shareholders: Those entitled to franking credits and those not. Accounting for such a policy will be a complex and costly administrative nightmare.
Middle Australia Retirees:
The A.L.P. is attacking those who have saved to avoid being a burden on the public purse.
Under the proposed policy, the most vulnerable people are those with SMSFs in pension mode with under $1.6 million in their funds. Because income from these assets is tax free, all franking credits will be lost under the proposed plan. Those with assets exceeding $800,000 in their SMSFs may well find it more beneficial to spend a portion of their SMSF balance to reduce their assets to less than $800,000 and thus entitle them to receive a part-pension and qualify to receive the franking credits refund. This will ultimately increase dependence on Australia’s social welfare system and defeat Labor’s original initiative to have all Australians living off their accumulated superannuation or personal investments in their retirement.
Falling Share Values:
Without the benefit of dividend imputation, many shareholders, including large parcels of shares held by the major institutional investors, are likely to reassess their portfolios. The logical approach would be to increase the mix of shares returning capital gains, rather than high dividend rates. Such a move will encourage investors to invest in offshore companies, where capital gains are more attractive. However, any decision to off-load shares in Australian companies will force a reduction in the value of Australian shares, thus reducing the value of retirees’ assets, accumulated by virtue of thrift and savings set aside over many years. Of further concern is that investments in overseas companies become subject to the vagaries of changing exchange rates. Any sell-off of Australian shares will see a reduction in the value of companies’ net tangible assets, higher interest rates on borrowings, lower profits and a reduction in companies’ ability to invest in future growth. The flow-on effect of this will be to reduce confidence in the Australian economy, restrict the growth of employment opportunities and to adversely affect exchange rates between the Aussie dollar and overseas companies.
Reducing Disposable Income:
For most retirees, both self-funded and partly self-funded, the additional disposable income provided by way of refunds of franking credits is returned to the greater economy through discretionary purchases; annual holidays, occasional dining out, purchase of gifts for children and grandchildren’s birthdays, replacement of household items and clothing and the like. All of these purchases generate GST revenue and employment, mostly in essential retail and service industries. Removing the franking credits will have a direct flow-on to the detriment of these industries and to state revenues allocated from GST receipts.
Gold Coast Retirees Inc. believes the Labor Party’s proposed policy to stop imputation credit refunds allowing cash refunds for excess franking credits will be grossly counterproductive in terms of government revenue collections, encouraging Australians to provide for their own retirement incomes, confidence in the Australian stock exchange and in the overall Australian economy. We reiterate, this proposed policy is: