Are franking credits back in Labor's sights?

When is this government going to start supporting Self Funded Retirees?

As with everyone else, they have to cope with the hugely rising cost of living and rising interest rates (yes, some do have mortgages), and all the while superannuation investment returns are very fragile or going backwards.

The general working population is getting pay rises, as are age pensioners getting their regular CPI increases; but who is giving SFRs a pay rise? The government has said that SFRs will not be included in any cost of living assistance measures. They've also said that now everything has returned to "normal" (sure!), the minimum pension drawdown rates will revert to pre pandemic levels. Extending the minimum drawdowns period for another year would have given SFRs more flexibilty on how their pensions are used and wouldn't have cost the budget a cent.

I can't help but agree with the sentiments expressed in this Firstlinks edition, and one who said the government was being spiteful; no doubt getting their own back on the "franking credits grab" election, that they lost.

There can be no doubt the government is out to "get" SFRs, who they see as wealthy, tax bludging baby boomers. No, SFRs don't pay tax in pension mode; but not for long I suspect. Taxing SFRs' pensions will always be high on the government's agenda, as will be their clawback of franking credits.

SFRs are responsible for their financial welfare but still need government support at the edges.

And to the supporters of a tax on SFR pensions, if you feel so guity about receiving your pension tax free, I'm sure the ATO will happily accept an ex gratia tax contribution.

"When is this government going to start supporting Self Funded Retirees?"

They won't! Ever! It's not in their DNA. The labor Party, under Albo, is more far left than previous iterations and intent on a new socialist agenda dressed up as Chalmers' new kinder capitalism!

With big spending programs committed to (NDIS, Defence, Aged Care etc) and many working families now "working poor" due to mortgage pressure, rising energy costs and inflation, clearly more taxes are required, but not from these people. Ergo wealth needs to be taxed and/or spending reduced! Reduced spending, efficiencies in government departments etc are very, very unlikely. Self funded retirees are considered to be wealthy and are often viewed as expendable capital as most don't vote Labor or The Greens.

"guity about receiving your pension tax free":

Assuage thy guilt;

Claim a capital, tax and effort free full Age Pension of $41,704 / y + $20,950 interest + seniors discounts. Claim $16,536 work bonus and pay 19% marginal tax.
https://superguy.com.au/retirement/how-much-can-a-pensioner-earn-before-it-affects-the-pension/

Just withdraw all capital from Super and spend all but $419,000 on home improvement and apply:
https://www.servicesaustralia.gov.au/assets-test-for-pensions?context=22526

"and pay 19% marginal tax":

Actually 31.5% marginal tax due to rolling off SAPTO.

Well said Jack. Super is meant to relieve the Gov of paying the old age pension to people like me and many others. It also means I don’t get a beautiful Health care card or any other concessions and have to pay full price for everything. The Gov ideally want us to spend or dwindle down or super balance , not add to it and hence make money and not pay tax on it. So how much do we need in retirement? We all have different requirements and goals in retirement so it’s hard to place a number on it, Paul mentioned $1.9 m, nice number. Perfect if you don’t have a mortgage. But there are some out there with insane amounts in smsf, balances that can’t possibly be spent in 2 lifetimes.
There are so many variables getting thrown at us, some have mentioned Medicare, DBT, to name just 2. The whole point is to relieve the Gov of paying pensions, don’t forget this!!

Unfortunately, the article doesn't mention those self-funded retirees who sit close to the margin and totally rely on franking credits as part of their annual retirement income to try to make ends meet - plus the saving to the government in not having to pay a pension to such people of whom I am one -
a now single female who worked all her life;
only just retired at 72; with assets above the ceiling to receive a pension but not sufficient to enable an income that covers essential living obligations.
If the government is to amend the franking credit regulations it needs to apply using a stepped approach so it does not as is often the case with super rules negatively impact those who need these funds in order to live.

Notice how franking credits figures for SMSFs change from 2014/15 to 2019/20. In the earlier period, SMSFs received $3.7billion in franking credits, of which $2.6billion were refunded or about 70%. This reflects the fact that many SMSFs are in pension phase which are not only tax exempt but also have no other tax obligations to offset against those credits.

By 2019/20, those figures had reduced so that SMSFs received only $3.2 billion in franking credits, of which $1.9 billion were refunded or about 60%. This reflects the impact of the Transfer Balance Cap (TBC) introduced by Treasurer Morrison in 2017, which forced super funds to transfer amounts in excess of $1.6 million out of the tax exempt pension fund into an accumulation fund that is taxed at 15%.

In the 2019 election campaign, Labour proposed to remove the refund of unused franking credits unless the recipient was exempt and claimed that it would collect $5.9 billion in additional tax.

This analysis highlights the absolute dishonesty of that campaign. The potential tax collected was never going to be anything like $5.9billion because entities like the Future Fund, industry super funds, unions and universities were never going to lose their franking credit refunds, but SMSFs most certainly were the target of this policy. The dishonesty extended further, because Labour never acknowledged the impact the TBC had on SMSFs and the tax it was already collecting.

Thank you Tony for finally bringing this deception to light.

I agree John, SMSFs were the target, off the back of increasing refunds. Which was always going to happen when you have fund earnings taxed at half the corporate rate.

So it was the tax preferred status of super that was behind the SMSF franking credit refunds. The franking credits policy was never the problem. It was the symptom, not the cause. And that has now been tightened up with the TBC and so on.

Yet Labor's approach was to treat the symptom and not the cause, even though the cause had already been treated.

"SMSFs most certainly were the target of this policy", "SMSFs were the target":

That implies nous. The shadow treasurer could not calculate gross income from net income and tax rate even after simply and multiply explained.

"Meanwhile tax-exempt entity refunds grew from $0.7 billion to $2.1 billion, noting that the federal government’s own Future Fund is exempt from income taxation, and received just over half of the 2019/20 tax-exempt entity refunds at $1.2 billon."

For a government strapped for cash it seems strange that the Future Fund gets an exemption from paying earnings tax like everyone else's super fund. Government could in fairness find some much needed revenue here. I know it would be a drag on compound returns, but that is the case for individuals super too! It would also create a more level playing field and a sense of fairness.

Adjusting public servants super contribution input to industry standard rather than 15.4% (remember this is tax payer money going in) would also save money and be a fairer outcome and would further align all stakeholders interests for future super tampering/change considerations.

To me the (apparent) war on franking credits is the wrong battle for the politicians.

The zero tax rate on retired people over 60 (and I'm one of them) is where the focus should be. It beggars belief that I went from a healthy 6 figure income one year, paying enough tax to support several full time Job Seeker recipients, to paying zero tax at all the next. That I can engineer my financial life to never pay income tax again in my lifetime - and my mother's got 30 years on me and she's still alive, so I could be here for a while - seems overly generous.

And of course, the Greens and the Grattan Institute are onto this and will shout that the tax rate on earnings in retirement phase super should be 15%, like in accumulation. No. But try 5% to start - there might even be votes in it.

Naturally I'm taking advantage of this situation as much as possible while I can, but it simply can't last. Attacking franking credits just targets a particular group, whereas if you go for everyone at a modest level you'll end up with lots more tax and I'm betting, if you explain it well, most people will go, "That's fair..." and cough up without too much angst.

Spot on Geoff. The problem is not franking credits per se but rather one group in society is highly incentivised by a zero tax rate to have the bulk of their income in fully franked dividends. If I were sufficiently motivated I could start an SMSF of soon to be $1.9 mil invested solely in shares paying a franked dividend of say 5% which is a grossed up yield of 7.14%. That is a tax free income of $135k+ less admin costs for both members of a couple. Add the tax free threshold + SAPTO for income outside super for both members of a couple and you are looking at an income of well over $300k for a couple with no income tax. That is obscene.

Geoff You seem to have forgotten that you have already paid tax. If you were a high income earner, you paid 30% tax on contributions and the fund also paid 15% tax every year on its earnings. Now you are suggesting another tax in retirement as well. You seem to forget that the whole point of this deferred consumption and having your money locked away for half a lifetime, is a tax free retirement. It’s what everyone should be aiming at. It’s true you are not eligible for the age pension but that was always the point of super’s tax concessions. The money you save the government by not collecting the age pension is effectively a tax. A single pension is $27,000. You need to earn $120,000 to pay that much tax.

I agree, spot on, Geoff. It is both ludicrous and demonstrably unfair that you and I pay no tax on our earnings.

Your respondent, Jack, appears to have misunderstood your point. No-one is suggesting tax on the corpus built up, to my knowledge, only tax on the new earnings. Surely the "pub test" is failed when your and my new earnings have no tax while everyone else's new earnings have tax; especially as we are now starting to cost the health system way more than at any time after our first year of life, yet don't even contribute to medicare.

Hi Alexander, have you and Geoff factored in the potential 'contingent' liability of 'Death Benefit Tax' of 17% on the balance of your 'taxable component' when and if your super passes to a deceased estate? There are of course ways this can be mitigated prior to meeting your maker... however, over the lifecycle of super the taxation structure is; 15% on concessional contributions, plus Division 293 tax of 15% above the threshold if you're a high earner... 15% on earnings whilst in accumulation mode and then potentially 17% DBT as you're being laid to rest or having your ashes scattered. Aggregated, this matches and can exceed the top marginal tax rate. Government do well enough out of super as it is... and every client I've taken through how DBT works are not throwing their hat in the ring to donate extra...

Good thoughts

It is really irritating that Labor, via Bill Shorten, then leader, spruiked franking credits as a non-taxed refund, not taxable income. FCs are INCOME which has been withheld by the ATO and are not due to be paid back until after the tax return is processed by the ATO. They are undeniably dividend income because they must be ADDED to one's total taxable income along with the dividends paid upfront by the company, which is then taxed at the individual's marginal rate. If at the end of calculating the tax owed on the taxable income, there is money remaining, that is refunded just as if the whole taxable income was derived from salary and wages. If the tax owed is zero, then the full value of the FC INCOME withheld, is returned to the owner of that income, the individual or super fund, etc. as the case may be.
It is not a RORT as the media and Labor led the general public to believe. It is YOUR MONEY RALPH!

Imagine the uproar were a portion of people's wages withheld by the ATO until their tax returns were processed.
The simple solution to avoid double taxation is for the company to pay the full dividend to the individual or super fund trustee. Then the full amount would be added to taxable income and there would be no talk of rorts.

"Imagine the uproar were a portion of people's wages withheld by the ATO until their tax returns were processed.":

Don't tell them that tax has been withheld from their wages else they will demand it be immediately be refunded in full.

"The simple solution to avoid double taxation is for the company to pay the full dividend to the individual or super fund trustee.":

Can ATO trust those foreigners to pay tax on demand anymore than wage earners?

Very interesting piece of research Tony. Maybe someone needs to show Treasury the revenue source that supported refundable franking credits in 2019/20 FY. I would have thought this finding would be entirely consistent with the rationale for the introduction of refundable franking credits in the first place.

Great article!! Clearly demonstrates and further reinforces that the current Treasurer, Assistant Treasurer and their colleagues do not understand the mechanics of the imputation system... or basic mathematics for that matter. This friends, is extremely embarrassing... and concerning...

Tony, your most important comment was left till last (just a shame that Treasury doesn't see it the same way ie that the div imputation system was introduced to ensure that the corporate tax rate was a withholding tax only, as far as resident taxpayers are concerned, and that the tax on income will be the ultimate individual shareholder's tax rate):

Applying the same maths to the franking credit offsets by tax bracket in the last table above, yields total top-up tax paid by individuals in 2019/20 of $5.6 billon. Which makes it hard to argue that the system is one of revenue leakage. And why the inclusion of franking credits in the TEIS for distributional analysis only, should remain just that.