Cuffelinks continues to receive emails from readers asking about Labor’s franking credits policy. Rather than respond in detail individually, we have collected 15 articles into one resource for people to consider. This issue will not go away and will become a major part of the next Federal election. We have had an unprecedented number of comments on this subject.
In addition, we reproduce a ‘sample letter’ which shows the intensity of reaction from a retiree who will lose $6,250 from his modest retirement income.
On 13 March 2018, the Labor Party announced its intent to deny cash refunds for excess imputation credits from 1 July 2019, if elected to power. Bill Shorten called it a ‘tax loophole’ in a speech laden with class warfare, and the public outcry was swift. Two weeks later, Labor capitulated and decided to exempt pensioners, thus sparing over 300,000 full and part-pensioners, people on government allowances, and about 13,000 SMSFs.
Cuffelinks has run a series of opinion pieces on the policy, some of which were published before the ‘pensioner exemption’ was declared. The op-eds dissect the policy’s motives, effects and equity.
The reader response has been considerable, garnering (as at 12 August) 579 comments. The list below links to each of the 15 articles, with a summary of the key message.
1. On 14 March, Ashley Owen calculated the impact of franking credits as 1.5% of a total dividend yield on Australian shares of 5.7%, or 25%. Owen saw one upside:
“If franking credit refunds are removed, it may lessen the myopic ‘home bias’ that many Australians suffer from and encourage them to increase their interest in other opportunities in global markets.”
‘Impact on returns from loss of excess franking’ had 15 comments.
2. On the same day, Nicholas Stotz calculated the impact on the after-tax income of a pension or super fund holding only shares paying fully franked dividends at various tax rates, and discussed whether dividend payout ratios and SMSF allocations would be affected.
‘Impact on pensions and super from loss of excess franking’ had 95 comments.
3. On 21 March, Warren Bird spoke to the underlying principles of equitable taxation:
Tax is paid only once by those who are obliged to pay it. In this case, it’s the owners, or shareholders. The collection of a 30% tax from the company is a prepayment of tax by the shareholders at a sort of a mid-rate. Shareholders who have a lesser tax obligation must receive a refund that places them in the same position had the company paid no tax and all dividends been taxed fully in the hands of the shareholders at their marginal rate.
‘Back to basics shows franking credit refunds are fair’ had 71 comments.
4. On the same day, Brad Newcombe analysed the impact of Labor’s policy on hybrids. He concluded that the pool of potential fully franked hybrid investors will diminish, but there may be an increase in margins attached to new hybrids. For those who can use the franking credits, that is good news. Newcombe said the impact was already visible as he put the case of NAB’s hybrid (ASX:NABHA) under focus.
Impact on hybrids of Labor’s franking policy has received two comments.
5. On 29 March, by which time the pensioner exemption had been floated, Jon Kalkman, a former Director and VP of the Australian Investors Association, called out Labor’s bluff:
“For all taxpayers on low marginal tax rates (especially retirees), the tax paid on dividends from Australian shares will be higher than other sources of income. As this increased tax will lower their income, this will distort investment decisions.”
In other words, Labor’s policy, even when amended, was not directed at the rich on highest marginal tax rates. Further, Kalkman argued that the policy will backfire in the worst possible way, putting pressure on the age pension system.
‘Tax-free super drives the politics of envy’ had 21 comments.
6. On the same day, Geoff Walker cautioned that logic will not win the day. Extrapolating from ABC’s Leigh Sales’ interview of John Daley (Grattan Institute CEO), Walker spelt out a hypothetical Q&A by which those ideologically aligned with the ALP could obfuscate the issue enough for radio shock jocks to carry on with ‘the rich getting concessions’ alarmism that feeds public fears.
‘Franking: never mind the logic, let’s obfuscate’ had 55 comments.
7. On 5 April, Howard Badger took on the case of why the policy was unfair to LICs.
Badger compared the tax levied on an accumulation super fund invested in LICs with it being invested in a trust or direct shares and with a HNWI trust. He concluded that, given a large percentage of investors in LICs are super funds and that many investors in LICs are not wealthy, the result is inequitable.
‘Labor’s new franking policy is unfair to LICs’ received five comments.
8. On 17 May, Michael Hutton spoke to the investment strategies that SMSF members and self-funded retirees could implement to minimise their losses if the imputation rules changed. Hutton explored choices around asset allocation, asset test thresholds, age pension eligibility, transferring the Australian shares part of the SMSF to a wrap account, and the inclusion of younger family members.
‘Four SMSF strategies if imputation credits rules change’ had 49 comments.
9. On 23 May, Matthew Collins looked at the various options available to SMSFs to reduce the impact of the new franking policy (if it became law), including changing the asset allocation, having one’s children included in an SMSF, not hastening from the accumulation to the pension phase, plus closing the SMSF and joining an industry or retail fund in order to avail of the member-directed investments feature.
‘SMSFs, member-direct and Labor’s franking’ had 29 comments.
10. On 30 May, Noel Whittaker argued that Labor’s policy discriminates against widows and widowers and that the wealthy are largely unaffected. Whittaker also took to task Bill Shorten’s rhetoric that the “high-priced medico on $500,000 is able to split income and pay less tax than the nurse on $50,000 a year” — alerting us that it cannot happen except by the ‘medico’ deliberately (or foolishly) investing in numerous loss-making investments. According to Whittaker, the rich already pay more than their ‘fair share’ of tax.
‘Labor, let’s face the facts on fairness, women and franking’ had 46 comments.
11. On 6 June, Tom Garcia articulated the distinction between direct-investment options and a wrap, how direct options work, who offers it, and importantly, showed how the impact from the loss of franking credits can be minimised under direct-investment options.
‘How do ‘direct investment options’ deal with franking credits?’ had 29 comments.
12. On the same day, at the request of a Cuffelinks reader (Trustee X), Graham Hand published an email sent by Trustee X to Shadow Treasurer Chris Bowen, Bowen’s response email, and the reader’s subsequent email to Cuffelinks.
Bowen refused to accept that the very wealthy whom the plan is supposedly targeting will not be affected. However, he did accept that the low-level SMSF of middle class Australians will be. Yet, Bowen shows no intent of changing the policy.
‘Shadow Treasurer Chris Bowen responds on franking policy’ had 68 responses.
13. Jon Kalkman returned on 21 June in response to a reader query, by laying out the legal foundations of imputation, being the avoidance of double taxation since franking credits are prepaid taxes.
‘What is Labor’s franking impact outside of super and pensions?’ had 47 comments.
14. On 26 July, Graham Hand revived the email trail between Chris Bowen and Trustee X, adding clarifying remarks and the entire set of emails between him and Trustee X.
‘Labor franking policy creates incentive to close SMSFs’ drew 33 comments.
15. On the same day, Ian Henschke established how the oft repeated ‘tax the rich’ phrase, fit for the ALP hyperbole, did not align with the facts. He advised of the formation of the ‘Alliance for a Fairer Retirement System’.
‘Tax on so-called ‘super rich’ could prove costly’ had 14 comments.
Call to arms
Wilson Asset Management has proposed that adversely-affected parties write a letter to their local member. A 'sample letter' provided by Wilson is published below, although it is specific to someone's circumstances.
Sample letter to the local member
I recently received in my post box a brochure from you saying that you stood for a “fair go”. I was a ten-year-old when my grandfather told me why he was a Labor man and it was because the Labor party stood for a fair go for everyone. Clearly this is not the case in regard to the Labor parties proposed policy on franking credits. This proposed policy will severely damage the quality of life my wife and I may expect in retirement. Apart from supporting Jo Vallentine in the Senate during the 80’s I have voted Labor up until this point in time. No more.
The current franking credit rules make sure that taxpayers receiving company profits are taxed at their marginal tax rate on this income. This is a fair result under our tax system and it offends me to hear it described as a “loophole” or a “rort”.
The refunding of excess franking credits has been a long-standing feature of the Australian tax system, having been introduced with bipartisan support in 2000. This has seen people saving for retirement factor in having franking credit refunds as part of their retirement income.
Retirement planning does not happen overnight. It takes decades, and is not easily turned around. I planned and saved diligently according to the rules of the day. There is much I would have done differently had I known of Labor’s intent to change the treatment of franking credits. I am horrified by your unfair shifting of the goal posts for vulnerable older Australians who have no like capacity to shift their retirement strategy or increase their income stream in the final years of their lives.
Labor’s announced Pensioner Guarantee does nothing to protect SMSF members, like me, who are self-sufficient and are not eligible for the Aged Pension. This reduces the incentive for people to save for retirement as I did, and in fact punishes me for saving in order not to rely on the Age Pension. It also creates an unequitable two-tiered approach for SMSFs; with an SMSF becoming less competitive, tax wise, than an Industry fund. This is unfair.
My wife and I have worked hard, paid considerable tax, and played by the rules. Now, your changes will result in a considerable loss to our comfortable, yet modest retirement income. We will lose $6250 and I can’t see any practical way to replace it. To see your rhetoric about these changes being aimed “at the rich” offends me greatly.
I have spoken with a Financial Planner who tells me that if we withdrew capital from our fund and purchased a more expensive home and spent some of our capital that we would qualify for a part-pension and retain our franking credits. I find this advice personally offensive to my values. Interestingly I hear of a number of people I know planning on this strategy. It seems I would be cutting off my nose to spite my face if I do not follow. Albeit at a cost to the Australian taxpayer.
I am in your electorate and voted for you at the last election. Fremantle is a safe labor seat so my changing my vote will not have any effect. However at the next Federal Election for the first time I will be assiduously numbering my Senate Ballot paper and placing the labor candidates at the end. I’ve an email distribution list of 197 people within Australia with whom I share articles of interest. I’ll be putting out on that my proposed Senate voting strategy for 2019. I already know from conversations with friends that they plan to adopt this strategy. There will be a multiplier effect in all of this.
I wish you well in the coming by-election as I know that you’ve been an assiduous local member. I will not be casting my vote in your direction.
Reader response
Readers are advised that the ‘sample letter’ will not apply to their own circumstances, and that they should consider their own situation.
Vinay Kolhatkar is an Assistant Editor at Cuffelinks. Cuffelinks does not warrant the accuracy of all the material in the articles above.