Treasury finds $10 billion ‘black hole’ in Labor franking credit policy

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The Government claims to have found a $10 billion ‘black hole’ in Labor’s policy to stop most refunds of franking credits.

Labor says it’s policy will raise $55.7 billion over 10 years, based on Parliamentary Budget Office figures. But a Treasury costing finds it will raise $45.8 billion.

“A detailed Treasury costing of Labor’s retiree tax proposal has revealed a $10 billion black hole in Labor’s expected budget revenue from denying tax refunds for dividend imputation credits over the medium term,” said a statement from Treasurer Scott Morrison.

“Treasury’s costing is the product of a thorough assessment of Labor’s proposal, including likely behavioural impacts of individuals rearranging their affairs to avoid the new tax, and follows consultations with external stakeholders, as well as analysis of relevant available data.”

“The costing also takes account of the changes Labor made to their new retirees tax within weeks of announcing it, after it became clear they had failed to consider the impact on pensioners. Despite their changes, Labor’s retiree tax still hits pensioners.”

Labor’s original policy was estimated to raise $59 billion over 10 years. But shortly after announcing it the policy was changed to exempt Age Pensioners and some SMSFs. According to Labor this reduced the expected revenue by $3.3 billion over 10 years.

Pointing to an assumption by Treasury that individuals receiving larger franking credit refunds were more likely to change investments in response than those receiving small refunds, the Treasurer said: “Labor have deliberately designed this cruel tax to hit retirees with small nest eggs who don’t have the option of changing their investment behaviour to provide for their retirement”.

Treasury expects that individuals and some SMSFs will respond to the policy by rebalancing portfolios away from shares that pay franked dividends.

“We assume that SMSF funds with members who also hold a reasonable share of their assets in APRA funds see a shift of those assets into APRA funds. Assets that shift into APRA funds are assumed to continue to draw the benefit of the franking credit since most APRA funds are in a net taxpaying position,” says the Treasury document.

Treasury didn’t “explicitly” model the response of APRA-regulated super funds, “as their refunds have been historically volatile”. But it is not expected they will receive significantly more refunds in the future, though Treasury does foresee potential mergers of funds to utilise franking credits.

Treasury notes costings are “sensitive” to expectations of growth of credits, the magnitude of behavioural responses and remain “heavily judgement-based”.

“The cost estimates over the medium term are particularly unreliable for this costing. This is because the costing compounds – so over time, the costing is increasingly sensitive to these assumptions around behaviour and growth.”

Shadow Assistant Treasurer Andrew Leigh denied there was a black hole, pointing to unreleased costings.

“Whoever wrote the report, it’s a waste of money. The resources of Treasury should not be used to attack the Opposition,” said Dr Leigh on Sky News, referring to the Treasury costings.

“Our policy has been costed. Our numbers are rock solid. They are backed by the independent Parliamentary Budget Office. The Government needs to abide by the Charter of Budget Honesty…”

Labor had it’s policy costed by the Parliamentary Budget Office, but has refused to release the costings. Asked about this Dr Leigh said: “We’ve released the same level of detail the Government releases when it brings down its budget.”

“The Treasury number is based on what the Government is making its own assumptions on and it’s a waste of taxpayer money. If they want to use some of their foreign political donations that go to the Liberal party to spend on Liberal Party attack ads and Liberal Party research, then they should go ahead and do that.”

The Liberal Party has released an ad, titled ‘Labor’s Retirement Tax’:

PBO stands by Labor costings

The Parliamentary Budget Office is standing by its costing of the Labor policy, and says it always takes into account current and future policy commitments in addition to behavioural changes.

“We stand behind the PBO estimates that have been published by the ALP in relation to this policy, noting that all policy costings, no matter who they are prepared by, are subject to uncertainty,” said Parliamentary Budget Officer Jenny Wilkinson.

“The PBO brings our best professional judgement to the independent policy costing advice we provide. We have access to the same data and economic parameters as The Treasury and draw upon similar information in forming our judgements.”

Wilkinson also said that the PBO is “explicit” in its advice about the judgements and uncertainties involved in costing individual policies.

In Senate Estimates Wilkinson agreed that the approach taken by the PBO in costing the policy had been ‘relatively conservative’, and said that the impact of changes in portfolios by SMSFs and switching to APRA-regulated funds was considered.

This article has been updated to reflect comments by the PBO. Originally published as: Treasury finds $10 billion ‘black hole’ in Labor imputation credit policy.

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