Labor’s policy to stop most refunds of franking credits is cruel blow to retirees, and fails four tests of public policy, says the Alliance for a Fairer Retirement System.
The Alliance for a Fairer Retirement System says Labor’s franking credits measure fails four tests of sound public policy – adequacy, sustainability, certainty, and “most importantly” fairness.
The Alliance was formed in response to Labor’s policy and comprises bodies including the SMSF Association and Australian Shareholders’ Association.
Chair of the Alliance, Professor Deborah Ralston, told Gold Coast Retirees in an address that the policy would severely dent the incomes of over a million Australians, the vast majority of whom could not be described as wealthy.
“For self-funded retirees and SMSF members this is a cruel blow. They have saved for retirement under rules that have been in place for over a decade, and now find they will lose up to 30% of their income in one hit if Labor is elected and implements this policy,” said Professor Ralston.
“Unlike the foreshadowed changed to negative gearing, there is no grandfathering proposed to allow individuals to adjust their investment strategies over time. This makes it especially harsh as many will be unaware of the impact of this proposal until it occurs.”
“Under these changes, an SMSF or self-funded retiree with investments in Australian equities may find themselves worse off than if they had not saved for retirement.”
Professor Ralston compares an SMSF in pension phase with $1 million in savings, all invested in shares generating $60,000 (including $18,000 of franking credits) of income a year, with a couple on the full age pension with $300,000 invested in shares via an APRA-regulated super fund. Under Labor’s policy, with some assumptions, the SMSF couple go from an income of $60,000 to $42,000, while the other couple stays on $53,573.
Ralston said this was a “situation the Alliance regards as fundamentally inequitable”.
“People who have worked hard all their lives to be self-reliant in retirement and have played by the Government’s rules suddenly find themselves in a situation where they will see their incomes slashed.”
“The end result will be to drive many retirees on to welfare, an outcome that is the antithesis of our superannuation system – people being self-funding in retirement. It also further undermines confidence in the superannuation system.”
The Alliance estimates that 1,239,000 people will the affected by Labor’s policy, including 437,000 SMSF members. Additionally 50 of the 240 large APRA-regulated super funds will be impacted, along with almost 2,000 people with small APRA funds and small business owners who have invested in their unlisted companies.
“The Alliance is deeply concerned not only by the negative economic impact that this proposed policy will have on more than one million Australians, but also by the psychological impact. We have been contacted by many older Australian who feel very let down and disappointed that the strategy they followed to save for retirement is likely to be undermined and leave them worse off.”
Companies looking to special dividends in response to Labor policy
With a Federal election due in the first half of 2019, some companies are already responding to Labor’s franking credit policy.
Treasurer Frydenberg pointed to reports that some companies are taking action in response to Labor’s announced policy.
“It was detailed in the media today that many of Australia’s biggest companies are devising strategies to pay out their franking credits as special dividends, before Labor has a chance to punish them if they were to win Government,” said Treasurer Josh Frydenberg.
Mr Frydenberg said that Labor’s policy was unfair because “a large proportion of those Australians with self-managed super funds are in the retirement phase, with little income to off-set their franking credits, compared with industry or retail funds which pool the income of all superannuants”.
“Many of the people in these large funds are not in the retirement phase and therefore have significant taxable income allowing the fund to get the benefit of their franking credits.”
“What will it take for Labor to admit they got this wrong and drop its unfair and economically reckless tax?”