Superannuation & SMSFs
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.
Labor is facing a backlash on its policy of stopping most refunds of franking credits from the “grey army” of over 1 million self-funded retirees, Advance Australia has claimed.
Advance Australia, sometimes described as the conservative answer to GetUp!, has so far received over 6,500 signatures on its petition against Labor’s policy and has a target of 10,000.
Labor plans to stop refunds of excess franking credits for most taxpayers, with exemptions for Age Pensioners and some SMSFs.
A survey of SMSF trustees by SuperConcepts has found that 72% of respondents plan to change their investment strategy in response to the loss of franking credit refunds.
Labor has announced a policy of stopping refunds of franking credits, with exemptions for Age Pensioners and some SMSFs.
The Australian reports that the Newspoll found 30% support for the policy, with 48% opposed and 22% uncommitted.
The latest Guardian Essential poll found 39% total support for stopping refunds of dividend franking credits. 30% in total oppose the measure, with 31% answering ‘don’t know’. Included in these figures are 15% who ‘strongly support’ stopping the refunds, and 14% who ‘strongly oppose’. Labor has a policy of stopping franking credit refunds for many taxpayers, though there are differences between Labor’s policy and the question asked.
50% of those who vote Labor either support or strongly support the measure, compared to 32% of Coalition voters.
Comparing voters, only the Coalition had higher levels of opposition to stopping refunding of credits (44%) than support. Labor, Greens and Other voters all had more support for the measure than opposition.
Those most likely to oppose stopping refunds of franking credits were those aged over 55 (42%), while people under age 34 were most likely to support it (54%).
Respondents with a household income over $78,000 support stopping refunds 48%, and those with a university education 46%.
The poll asked:
When companies pay dividends to Australian shareholders out of after-tax profit, shareholders receive franking credits, which they can claim as a tax deduction. If the shareholder does not pay any tax, they receive a cash refund from the tax office. This system is known as “dividend imputation” and these cash payments cost the Government about $8 billion per year. The Labor Party has proposed to end the cash refunds for imputation credits. Taxpayers will still be able to claim a tax deduction. Do you support or oppose ending the cash refunds?
IPA CEO Andrew Conway says: “If we were designing a new tax system today, you would most likely not have full imputation where the taxation is assessed in the hands of the recipient and any excess franking credits are refunded.”
“In today’s economic circumstances it would be difficult to justify from a fiscal sustainability perspective,” he said.
However the IPA doesn’t support Labor’s policy of stopping refunds of franking credits, unless it is linked to “holistic” changes to the tax treatment of savings.
“The case for removing dividend imputation is not strong and any tinkering needs to be assessed against some alternative benchmark tax system such as removing dividend imputation entirely and replacing it with a discounted tax rate,” said Mr Conway.
The IPA has welcomed the establishment of a Parliamentary inquiry into the implication of removing refundable franking credits – which held two public hearings last week, with a third scheduled for this week. Mr Conway said the inquiry will “heighten community understanding of a well-established feature of our taxation system”.
“The Labor Party is proposing to change the rules to remove the ability for individuals and superannuation funds to claim their full entitlement to franking credits,” he said.
“The inquiry will highlight the significant implications attached to any change in government policy on refunding imputation credits.”
The Advance Australia website currently lists only two campaigns: one opposing Labor’s policy to stop refunds of franking credits for many taxpayers and other around not changing the date of Australian Day.
“Having certainty means you can plan for your future with confidence. So when politicians keep re-writing superannuation laws, it suddenly makes your hard-earned retirement less certain. Once again, politicians are seeking to move the goalposts on superannuation,” says the webpage for the Hands off My Super campaign.
Advance Australia claims that “Labor believes scrapping the tax credit will give them billions of dollars a year to increase Government spending on welfare. They are taking the money off hard working pensioners and retirees to give it to others – that’s not fair”.
Labor tweaked its policy to exclude Age Pensioners and SMSFs with members receiving the age pension at the time of the announcement. The Coalition has increased taxes on superannuation with its changes in recent years, for instance by more than $5.2 billion over four years via the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016.
According to reporting by the ABC, Advance Australia is supported by business leaders and its national director, Gerard Benedet, was the chief of staff to Queensland LNP Tim Nicholls. He told 7.30 that the group is “not aligned to any political party”.
The petition – which asks for email address, phone numbers and address – reads:
Dear Bill Shorten,
Together, with many other hard-working Australians, I’m calling on you to abolish Labor’s new superannuation tax laws that will force many Australians to work longer and harder before retiring.
It’s shifting the goal posts on retirement—and that will leave many people fearful about their future. It’s just not fair.
My fellow Australians and I need certainty in order to plan for a secure retirement—so Labor needs to scrap its plans to abolish the imputation tax credit refund.
Please take action to help us Advance Australia—and scrap your super plans that will put my retirement funds in reverse.
SuperConcepts has done a 20-year projection of someone aged 65 with a $900,000 SMSF balance – the average SMSF balance for someone of that age – receiving the minimum pension payment for that amount of $45,000 a year. The analysis found their retirement savings would be 15% worse off after 20 years without refunding excess franking credits.
Peter Burgess, SuperConcepts general manager of technical and education services, said the data is “very confronting”.
“Our data analysis supports a view that the Federal Budget will receive much less than the projected $55 billion over 10 years from this measure and that the budget savings will not come from high net worth individuals, rather it will come from the lower end of the income spectrum,” he said.
The SuperConcepts analysis indicates that after 20 years the balance would be $953,480 with refundable franking credits or $825,519 without – a difference of $127,961. This was based on a number of assumptions, including a 40% allocation to Australian shares, 3% capital growth and 4% income return.
“This equates to a significant impact on the fund’s earning rate and the total income received per annum,” said Mr Burgess.
In the first year of the comparison the income received with franking credits is $36,771 compared to $30,600 without refunded credits – a difference of $6,171. This income differential grows over time, by 5 years it is $7,631 a year and 10 years out it is $9,207.
“As a consequence, after 10 years the member’s minimum annual pension entitlement would reduce from $60,756 to $56,762 and after 20 years from $88,298 to $76,991.”
“This is due to their retirement phase benefit being replenished at a lower rate as pension payments are made, resulting in a quicker depletion of their superannuation assets. While the member in this example could increase their pension payments above the annual minimum requirement, this would accelerate the depletion of their capital and increase their dependency on the age pension at an earlier age.”
Mr Burgess said it was worth noting that the introduction of the Transfer Balance Cap would limit the impact of removing refundable credits on larger SMSFs – as credits could be offset against the taxable income in accumulation phase.
“This is an important point because it means SMSF members with a total superannuation balance in excess of the general transfer balance cap (currently $1.6 million) may not be impacted, or the impact from removing refundable franking credits, will be much less than first anticipated.”
“In other words, the projected budget savings of $55 billion over 10 years is unlikely to be realised and much of the revenue that will be raised will come from the superannuation accounts of members which much smaller superannuation balances.”
Research by the Financial Services Council (FSC) indicates that up to 2.6 million members of APRA-regulated super funds (both large funds and Small APRA Funds) could be affected by stopping refunds of excess franking credits.
The FSC has set this out in a submission to the Parliamentary inquiry into removing refunds of franking credits – which is holding public hearings this week. The submission does note that 2.6 million is an “upper limit” to the figure, due to duplicate accounts.
It has been suggested that large funds would not be as impacted as SMSFs, by offsetting franking credits against other tax owing instead of receiving a refund. But exactly how Labor’s policy would impact large superannuation funds is unclear as there is no draft legislation.
The Government has said that around 2.6 million APRA-regulated fund members would be affected – losing refunds which were worth around $300 million in 2015/16. Labor Shadow Treasurer Chris Bowen questioned the figures at the time, saying it was “absolutely meaningless” to aggregate small and large APRA-funds.
The FSC has now reached similar figures – its research is based on similar or the same data – putting the total refunds claimed by all APRA-regulated funds in 2015/16 at $308.8 million. Around $235 million of this relates to large APRA funds, with the remaining $74 million going to Small APRA funds (SAFs).
The FSC estimates that in 2020/21 removing refunds of franking credits will cost large APRA-regulated funds $301 million and cost SAFs $20 million.
The FSC is also critical of the “unlevel playing field” created by Labor’s ‘Pensioner Guarantee’. Shortly after the original policy was announced Labor tweaked it to exclude Age Pensioners and SMSFs with members receiving the Age Pension at that date.
“Many of the large funds that benefit from refunds have a substantial number of retiree members…, and some of these retirees will receive the Age Pension,” says the FSC in its submission.
“These pensioners would not benefit from a policy that only provides franking credit refunds to SMSFs with Age Pensioner members.”
FSC CEO Sally Loane said: “The FSC considers that franking credit refunds should continue. They provide substantial support to the retirement savings of millions of Australians — including many with fairly modest savings.”
“Constant tinkering with the rules on retirement savings and superannuation, and hitting retirees hardest, will only erode confidence in the system, leaving more Australians reliant on the age pension.”
“The FSC supports a moratorium on adverse changes to the superannuation system, including changes to franking credit refunds. A more stable superannuation system will encourage engagement and confidence in the system and increase self-reliance in retirement. If policy makers keep moving the goal posts Australians will disengage with the super system and stop contributing more to their superannuation.”
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The Inquiry into the implications of removing refundable franking credits was formed by the House of Representatives Standing Committee on Economics at the request of Treasurer Josh Frydenberg. Labor Shadow Treasurer Chris Bowen said it was an “unprecedented step” for a minister to make a reference to a parliamentary committee solely on the subject of an opposition policy.
Ahead of the public hearings the Chair of the Committee, Coalition MP Tim Wilson, said “the committee is examining how the removal of refundable franking credits would affect investors, in particular older Australians who have planned for their retirement based on the existing rules and whose financial security could be compromised”.
“There will be time during these hearings for short public statements so that people can speak into the microphone and tell us how they will be affected,” he said.
“The committee has received hundreds of submissions from retirees who are concerned they will be forced on to the aged pension if the ability to claim a refund on their franking credits is removed.”
The Committee has thus far published 240 submissions, but only four from organisations. No submissions for the public hearings have yet been published.
A list of groups appearing before the public hearings has yet to be published at the time of writing. However the Institute of Public Accountants (IPA) will appear before the Melbourne hearing and the Alliance for a Fairer Retirement System will appear in Sydney.
“The committee looks forward to hearing from a range of stakeholders and members of the public about who would be affected by the removal of refundable franking credits, if it would result in increased reliance on the pension, and the stress and complexity it would create for older Australians in adjusting their investments,” said Mr Wilson.