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Tax on so-called 'super rich' could prove costly

In March 2018, the Labor Party announced a radical new policy. If elected, it would close a 'tax loophole' exploited by the rich. It would reap $59 billion over 10 years by disallowing tax credits from Australian shares to be paid to people who had little or no income. Labor leader Bill Shorten said: “A small number of people will no longer receive a cash refund.”

Adverse member reaction

But the ‘small number’ was a large number. It included hundreds of thousands of pensioners, part pensioners, war widows, people on Centrelink payments and self-funded retirees. The Australian Stock Exchange says 58% of retirees own shares and Australia has more than three and a half million people over 65.

These people never saw the imputation credits they were being paid as a ‘tax loophole’. Quite the opposite. Many saw themselves as investing in the future of the nation and getting a benefit in their retirement. They’d been encouraged to take up shares in initial public offerings like CSL, Telstra, Qantas and the Commonwealth Bank. It was also income they had relied on for almost 20 years.

So, would it be fair to change the policy? We did a poll of National Seniors members and found nearly 90% thought the removal of tax credits for retirees was unfair.

It was apparent the proposal to end the payment of tax credits had unintended consequences. Bill Shorten realised this after an extraordinary outcry. He announced he would modify his policy. National Seniors fought for and helped win that change for more than 300,000 pensioners who would have lost $3.3 billion over 10 years.

Labor said if elected it would exempt all full and part age pensioners from its policy. It was called the ‘Pensioner Guarantee’. We think more needs to be done. The follow-up poll we did after the ‘Pensioner Guarantee’ was announced revealed two out of three members still thought the policy was unfair.

Middle-class retirees abandoned

The ‘Guarantee’ protects only a fraction of those affected. What about the rest who are self-funded retirees? The purpose of the policy, according to the ALP, is to stop the rich rorting the system. But what if you’re not rich, not rorting and not a pensioner?

The policy means a 30% drop in income from shares. This is why the Coalition is calling the Labor Party proposal a Retirement Tax or tax on retirees.

One member, Joe, said he had worked and paid taxes for 49 years and is not ‘rich’. He summed up the feelings of many self-funded retirees, saying: “My generation was encouraged to plough more into superannuation and, if possible, invest in shares in Australian companies so we could be self-sufficient.”

Joe, like hundreds of thousands of others, made his investment decisions based on a policy that’s been in place since July 2000.

Another member wrote: “By any measure the Labor policy is unbalanced and unfair. It should be either amended to focus on the truly wealthy, or (the policy should be) abandoned.”

Australians want a reasonable level of certainty in financial planning and superannuation. What happened in March shows politicians can’t afford to ignore people’s concerns and it is possible to adjust a policy to make it fairer.

At the time, National Seniors said we hoped this would lead to a proper debate about how we can have a fair and sustainable retirement system in a rapidly ageing Australia. Former Minister and Labor power broker Graham Richardson wrote: “Self-funded retirees have never really organised themselves into a powerful lobby group and that makes it much easier for governments to send out a raiding party.”

The organised response

This was a call to arms. Half a dozen organisations decided to band together to form the Alliance for a Fairer Retirement System. That has since grown to 10, including the Association of Independent Retirees. The Self-Managed Super Fund Association and National Seniors were founding members.

The Alliance chair is a highly-respected superannuation expert, Professor Deborah Ralston. Its website was formally launched last Friday by personal finance guru and author Noel Whittaker AM. Mr Whittaker gave a powerful example of how a couple who had saved $1 million in shares would be worse off than a pensioner couple who had saved $300,000 in shares. He said the policy was “ridiculous”.

Last week, the Alliance took its case to Canberra. It met with politicians from both the government and opposition, and with officials from Treasury and Social Security. National Seniors was also part of an Alliance delegation that met with Shadow Treasurer Chris Bowen and his advisers.

It pointed out the new policy results in pensioners (who keep their credits) being better off than self-funded retirees who lose theirs. The Shadow Treasurer insisted the policy would not change between now and the next federal election. He also said he was open to an honest debate in good faith.

The Alliance stressed the whole retirement system needs to be fair, adequate, sustainable and have certainty. One in every two voters is now over 50. As Sir Humphrey says in Yes Minister, it would be a ‘very brave’ move to ignore them.


Ian Henschke is Chief Advocate of consumer lobby group, National Seniors Australia. The article is published with permission from National Seniors.

Chris O'Neill
September 17, 2018

"But the ‘small number’ was a large number."

Indeed. More than a million people receive refunds of company tax they are imputed to have paid.

July 26, 2018

It bodes poorly for the future of legislation in this country when Mr Bowen is prepared to insist that "the policy would not change between now and the next federal election."

The ineptitude self-evident in this policy makes one wonder if it has been perused by anyone who has an in depth understanding of dividend imputation and an ability to comprehend the wonky outcomes that would result.

Moreover, as a supposed elected representative, what right does he have to say something will not change, and why would any politician with a shred of good sense paint themselves into a corner like that?

I fail to see how a "honest debate in good faith" can be had after any prospect of change has been quashed. A disgraceful stance from any perspective.

John Riddell
July 26, 2018

My wife and are are 100% fully self funded retirees and like others have voted labor all our lives until now!

A point that seems to be overlooked by commentators about Labor stripping our excess franking credits from us is that by being self funded we are saving the Government up to $35,000 in pensions and other perks like cheap pharmaceuticals, and reductions on various rates and taxes.

For this saving Labor are intending to further penalize us by losing our approximately $5000 a year excess Franking Credits rebate for living a thrifty life and saving for our own old age.

We are not rich by any stretch of imagination and object to being inferred as such by Chris Bowen. I am sure he could buy and sell us over several times.

July 26, 2018

I am so glad to see that mutliple organsations are forming an alliance to lobby parliamentarians. I remember back in the early 1990s how my father was bemoaning the fact that this new breed of retiree called a "self-funded retiree" (as opposed to the pensioner) did not have a collective voice in public discourse. Over the years, I suggested to him that a ground swell was forming and that before too long a watershed moment would "rock their boat" and result in the formation of a powerful lobby group for years to come. May be this is the watershed moment. Alas it has come too late for my father.

July 26, 2018

I am pleased to see some reference to the impact of Labor's proposed policy on those other than self-funded retirees and older folk.

I wonder if Mr Shorten and Mr Bowen truly understand the implications of this policy for those genuine low income earners who do not benefit from the pensioner exemption provisions. To my knowledge, every other form of income is ultimately assessed at the relevant marginal tax rate of the final recipient. Under Labor's proposal, a low income earner who has a modest holding of shares stands to be taxed at a flat 30% on the smallest of fully franked dividends received. A flat 30% tax rate is approximately equivalent to the overall average (not marginal)) tax rate paid by a top marginal rate taxpayer earning $180000 a year. Based on the usual tax free threshold of $18200 applied to individual non-super income, as an example:

- I could have $18200 distributed to me by a wealthy relative via a discretionary trust (which, like a company, is just another legal structure) tax free.

- I could earn interest on approximately $600000 of my own cash at 3% per annum and pay no tax.

- I could own outright an investment property potentially worth a million dollars or so, and pay no tax on post deductions rental income of up to $18200.

Yet if I earn even one dollar of fully franked dividends on the smallest of holdings, I am taxed at a rate equivalent to the average income tax rate applied to income earners on $180000 a year.

Meanwhile, as long as I earn more than $37000, putting me in the 32.5 percent tax bracket, I effectively receive the full benefit of the franking credits as a 30% reduction of my marginal tax rate. In other words, only poor tax payers have to pay the 30%. Everyone on higher incomes pay no more than they do now.

As for the argument that a company, which is no more than a legal structure for running a business, should be liable to pay a minimum of 30% tax regardless, this is effectively rendered moot by Labor themselves who have proposed exemptions for certain arbitrary categories of franking credit recipients such as charities. Why not make them also forgo the refunds and legislate offsetting benefits elsewhere if appropriate? The exemption certainly avoids a bit of potential negative media coverage.

As for the argument that lower taxed super funds and elderly investors subject to higher tax free thresholds are making a killing by the claiming back of excess franking credits, this been somewhat negated by the $1.6 million pension cap already introduced by the LNP.
In any event, the appropriate way to address this would be via an adjustment of the relevant tax rates and thresholds. Not by depriving the least wealthy of shareholders from receiving a fair and reasonable refund of franking credits which affords them the same income taxation treatment as those who are much wealthier.

Labor's determination to see this policy through irrespective of the lack of fairness and logic involved, leaves me wondering if there is another agenda at work, such as taxing self-managed super funds (disclosure: I currently do not, and have no plans to, have a self-managed super fund), while having minimal negative impact on Industry super funds, or other vocal lobby groups such as charities.

Unfortunately, it seems the fact that the most modest of share investors will be the ones caught in the fallout has been ignored. Granted this is probably a fairly small segment of the population, but that is no excuse for poorly structured and unfair policy when there are other more effective options.

brian Richards
July 26, 2018

It s strange that the retrospective legislation enacted by the LNP government which "robbed" 330k part pensioners of there pension entitlements did not generate the same amount of discussion in the senior community, probably because 330k is a much smaller number than the 2m people affected by the proposed franking credit changes.
Now not only have these people been "robbed" of their part pensions by the LNP but they will also be "robbed" of their cash refunds from imputation credits by the ALP.
It looked like a simple decision for us to switch our allegiance from LNP to ALP but we now have the dilemma of both parties targetting those previous part pensioners who have in most cases lost much more than other self funded retirees will lose with the Franking Credit changes.
It only proves to me that pollies of both persuasions are committed to plundering the savings of those who made provision for their retirement years before and after they die and should send a signal to those still in the workforce to look closely at what they are saving as too much will seriously disadvantage them!

David Heath
July 26, 2018

Outrageous policy shift for me. Hoping to convince my family never to vote for Labor again. I will close or completely restructure (sell most of my ASX shares and buy US securities) our SMSF (in pension phase) if this is introduced. In my opinion the Labor party needs to be attacked over this (and also changes to CGT) - perhaps an advertising campaign by seniors like what happened with the resource rent tax.

July 26, 2018

This proposed policy change is very fair, and in is good policy. In fact in the long term this policy will be beneficial for the country and for the retirees.

Franking credits (Imputation rebates) were never meant to be refundable, merely reduce your taxable income to nil, just like every other rebate.

As an example, if I buy Apple shares and it pays a dividend, I pay tax at 15% on this dividend. I can get a credit for this tax in my return, but guess what, it is NOT refundable, i.e. if I pay no tax, I don't get this refunded.

If I buy Telstra, the company pays tax at 30% (to be reduced to 25% over time) and I get a credit for this tax in my return, but guess what this is refundable, i.e. even if I pay no tax I get a refund.

How is that fair?

Naturally self-funded retirees have bought Telstra in droves (it is the fifth biggest holding of SMSF's). but very few own Apple shares.

So this policy has encouraged SMSF to buy shares with in low growth Australian Companies who pay high fully franked dividends and avoid high growth companies such as Apple or indeed our own CSL.

The real reason why many SMSF are screaming blue murder with this proposed amendment is because the policy shows up the very poor asset allocation issues of many SMSF;s.

If I was in pension phrase (which I am not yet), I would have about 60% of my assets in growth and about 40% in defensive (such as cash, term deposits and bonds).

Of the 60% in growth, something like 15% in commercial property(including trusts), 20% in Australian shares and 25% in overseas shares. Stocks like CSL (which pay unfranked dividends) would be part of the Australian allocation.

I know some SMSF pensioners who have 60% of their funds in fully franked Australian shares. This is way too much for one in pension phase. .The real problem with many Australian SMSF's is not Australian Labor Party policy (this is the correct spelling), but rather their own poor asset allocation.

So why is this policy good for SMSF retirees in the long term (if not in the short term)? It will force many to change their asset allocation, to incorporate fewer low growth Australian stocks which have stagnant or reducing dividends, and have more high growth stocks with ever increasing dividends.

I hear many SMSF retirees say "I need income," Simple, sell a few shares a year in Apple or CSL and watch the rest of your holding continue to grow. Next year, you need to sell fewer and the year after that fewer still. In a decade you may not need to sell any more, as the ever growing dividend stream will be enough.

Meanwhile Telstra and the Banks share prices have gone no-where in the past decade.

I would like to thank the Labor party for this policy, because they are helping many of us review our asset allocations.

July 27, 2018

A lot of opinion there.

I question why it is fair for anyone earning over $37000 a year in income to receive the full benefit of the imputation credits as a reduction in their income tax liability, while someone on less than $18200 loses that flat 30%. That is about the same average tax rate paid by a salary earner on $180000 pa.

As has been pointed out elsewhere, it would be consistent with the treatment of other sources of income to leave the imputation refund arrangements as they are, and adjust the marginal tax rates of the target groups.

The possible irrationality of some SMSF trustee's investment allocations pales into insignificance beside the irrationality of Labor's proposed imputation credits policy.

Gary Burgess
July 27, 2018

Gee Peter, thanks very much for the investment lecture. Pitty you are missing a few fundamentals like that franking credits are actually based on the company tax paid. 15% witholding tax on overseas Apple dividends have nothing to do with share ownership but OS investing. Further you don't seem to understand that the imputation system is based on ultimately taxing any distributed company profits in the hands of their owners (shareholders). Finally if the ALP policy is so great, then I wonder how come unions will still be refunded all franking credits from their investment portfolios.

July 26, 2018

Although I'm only in my early 40's my husband and I are planning towards being self funded retirees, unfortunately Labour has lost our votes as well.

July 26, 2018

I agree with Rob & Ric. As self-funded retirees my wife & I just miss out on receiving a part-pension so I will never vote Labour again because of Labour's franking credits policy. I made my investment choices using the rules at the time. How can I plan when both Labour & the Coalition make continual changes to the rules governing pensions and SMSFs.

July 26, 2018

Been a labour voter for years till this announcement, ,they have lost me and 3 kids ,5 grand children ,as when it was explained to them they all said we are with you dad,..I worked many jobs never said no to overtime to be independent of system ,now got this kick ,very unhappy ,With so many retirees,, we need to stand up to this selected penalty ,,we made our decisions in good faith on the rules at the time.... NOT GOOD ... ,,GOOD BYE BILL AND BOYS FOR ME RIC...

July 26, 2018


Labour has lost my vote over this, and I know of many others who feel much the same way and have not yet made their voices heard over this, so the undercurrent is perhaps stronger than many suspect.

July 26, 2018

Insightful piece on how the industry bodies and consumer groups can come together... and also how powerful the grey vote may be.


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