Labor franking policy will change behaviour

There is a popular misconception being deliberately introduced by the ALP and their media mates (such as the ABC) that confuse the uninformed public about tax assessed to retirees and tax paid by retirees. Retirees all pay a lot of tax by deduction from their dividends but they are entitled to an exemption from tax on the income from their pension funds with less than $1.6m.
Young people do not understand that the ALP wants to keep the overpaid tax from a selected group of individuals who have their own SMSF and have saved for their own retirement so as no to be a burden on the Australian Taxpayer. Just why the ALP has singled this group out to effectively remove their tax exemption with a massive 30% tax rate is beyond my comprehension.
And just why anyone would think it ok to tax this group at 30% and their neighbours with the same asset base invested in a Union fund 0% is also beyond my understanding. It has never been done before in Australia.

"Just why the ALP has singled this group out to effectively remove their tax exemption with a massive 30% tax rate is beyond my comprehension.":

It is amusing to guess why. My guess is that Labor did not understand 'imputation', announced the un/ill-considered policy, could not afford to admit that and now 'doubles-down' by calling tax refunds 'gifts' to hoodwink voters.

The singling out was a result of policy back-peddling.

Simon Crean understood it. When Peter Costello in 2001 made up for the glaring omission from Keating's introduction of the imputation system, the then Opposition Leader said:

Although imputation credits can be used to reduce an individual's or a superannuation fund's income tax liability to nil, excess credits were of no value to taxpayers. This bill proposes to refund to taxpayers any excess imputation of credits that may be left after offsetting the credits against their income tax liability. The classic example of such a situation is a low income person who earns a little investment income—for example, a full rate age pensioner.
They face no income tax liability on their income and therefore cannot obtain the benefit of the excess franking credits attached to the small amount of dividend income they receive. Under this proposal, they will obtain a refund of their income tax from the Taxation Office, representing the excess imputation credits. Labor included this proposal in our taxation policy prior to the last election. Therefore we have no difficulty supporting the proposal because it is our policy. It builds on the major reform accomplished by Labor almost 15 years ago and it improves the current taxation situation faced by low income investors,
especially retired Australians."

LABOR supported the introduction of franking credit refunds! It was aligned with THEIR POLICY, which had proposed it before the previous election.

(Thanks to the Parliamentary Inquiry report for quoting this.)

So, so wrong on so many levels Bill Shorten and company. Shame, shame, shame for retired people who cannot go back into the work force to suddenly "pull the rug out from underneath them". In a word it is stealing however Bill Shorten does not have a problem with this. SHAME on you Bill Shorten

Having discussed Labor's plans for franking credits with a lot of SMSF retirees and Labor's insatiable appetite for OPM (other peoples money) and historical mismanagement of the countries income I am detecting not only a fear of losing franking credits but a general feeling that if elected they will cause the biggest flight of capital out of Australia in history and the abrupt re-introduction of double taxation could be next on Bowens agenda, if even some of this scenario comes true Labor will preside over the worst depression ever.

I would appreciate some constructive critique of the following thinking regards potential changes in strategies.

Assuming the proposed changes go through, I will have “ghost” Franking credits created both outside super and inside super (pension mode SMSF) which have no value unless I can find some use to put them to. A couple of additional strategy changes for getting value from them seem to include:

1. Borrowing (either inside and/or outside of super) to fund further investments such that the interest costs can be offset by these “ghost” franking credits. I get the benefits of leverage at zero cost because I use otherwise useless franking credits?

2. Close my SMSF and move all funds out of super. Assuming I have “enough but not too much” in my SMSF and “not too much” out of super then the “ghost” franking credits can be put to offsetting the PAYG tax obligations and I can dispense with my SMSF and associated obligations ?

I do concede there are some specifics of asset levels and franking levels both in and out of super however there does seem to be an opportunity here for some.

Have I overlooked something ?

"constructive critique":

Would require an unavoidable tax liability to make use of franking credits attached to current income. No tax liability in pension account, 15% concessional contribution and earnings tax liability in accumulation account.

No point removing from super. Former 0%, 19% tax rates would have been 'vaporised' replaced with 30% (company) minimum tax rate where tax liability = franking credits:
https://docdro.id/0nzjM6G

I am currently unaffected by Labor’s franking proposal (mainly because my super is in industry funds). However, at the risk of prolonging this debate (which I know will go on and on right up to the election, and afterwards if Labor gets up), I ask a couple of basic questions of Labor that I am sure they will not answer. Perhaps the Libs would be wise to start hammering away at them with these questions, because they highlight the basic flaws in the proposal.

1. Bill Shorten said on Insiders last week (3/2/19) words to the effect that “no principle says it’s fair that a non-taxpayer gets a tax refund” and called the current situation “crazy”. OK, so if it’s all about non-taxpayers getting cash tax refunds, let’s compare two situations.

• Taxpayer A receives cash dividend income of $7,000 plus $3,000 of imputation credits. The $3,000 is tax paid by the company that is imputed to have been paid on behalf of the shareholder. No-one can argue with that concept, that’s how the system was set up by Keating and Labor is not planning to change this basic principle. Assume that taxpayer A has no other taxable income. Currently they declare $10,000 in income and because they are under the tax-free threshold, they get the $3,000 fully refunded. Labor will scrap this refund because Bill says that it is “crazy” that a non-taxpayer gets a tax refund.

• OK Labor, so I challenge you to do the same to Taxpayer B, who only works for a month (eg retires in July or August) and earns $10,000 gross. Their employer deducts PAYG tax because they have to do so (just like a company must pay tax on its profits before declaring a dividend). Let’s assume that the PAYG tax deducted is $3,000 (in practice it is slightly less than this, but could be more if no TFN is given). So the taxpayer receives $7,000 in cash and declares $10,000 in income at the end of the year, along with the $3,000 of PAYG tax already paid. They are under the tax-free threshold. Sound familiar? Sounds just like Taxpayer A to me! Labor, I challenge you to deny taxpayer B their cash refund, as they are a non-taxpayer!
When you look at this example, Labor’s proposal is shown up to be poorly considered.

2. Following on from the example above – Labor has (reluctantly) said that part and full pensioners will be able to keep their cash refunds. Really, what happened to the “principle” that Bill talked about? If taxpayer A above had only $100 pa of part pension, maybe because they have a large non-income producing asset, then they are still a “non-taxpayer” but they will get the refund under Labor. Bill, this exemption is crazy by your own words, so why allow it?


As noted at the beginning, this does not affect me, but it does worry me that Labor will get in and implement this policy which has holes all through it. I congratulate them for wanting to fix the tax system and reduce the budget deficit, but this policy has too many holes to make it fair and workable. Please go back to the drawing board and work out other ways to fix the tax system.

Thanks Cam for pointing out a question that Chris Bowen will not answer.
I have another question to which I cannot get an answer.
Mr shorten stated that people who have invested through negative gearing will be grandfathered if they invested before the new legislation is passed. This is because they invested under the the tax laws in place at the time.
I contend that people who have invested in shares have done so under the tax rules in place at the time. Why is it that this group are not to have their investment Grandfathered?

Thanks for your article Deborah. Most of the above responses have typically focused on investor behavior (or more precisely trustees of SMSFs). However, not much feedback on how corporate behavior will be impacted. This pretty much mirrors the broader debate around behavioral changes. I thank you for raising the possible impacts that may arise from corporate behavioral change. For me, this is a really interesting issue. All this pent up investor emotion associated with this topic will eventually spill over into the corporate boardrooms and specifically, dividend policy. Corporates with large franking account surpluses may look to reward their shareholders with a one-off special franked dividend prior to the proposed changes to franking credits. However, if this behavior transpires, I have concerns that companies may be placing undue pressure on their dividend cover ratio at a time when continuing profitability may be problematic. If an unforeseen economic shock were to place Australia into a recession within a year or two, companies that seek to change their dividend policy (lift their dividend) in order to overcome the shortcomings of the ALPs refundable franking credits policy in the short term may not have had sufficient time to replenish their retained earnings base. In this event, these same companies may be forced to severely cut their dividend payout ratios at the worst possible time for income investors.

As an income seeking investor, I am always looking at “what if” sensitivity analysis. Whilst I can easily factor in the impact of ALPs proposed changes, I would find it more difficult to predict changes to companies dividend cover and dividend payout ratios in recessionary times. This becomes even more problematic if company directors start to engage in short term, dividend cover eroding, strategies that are aimed at counteracting new unpopular government tax policy.
In the aftermath of recession, try telling shareholders (not just SMSFs) that the special dividend in 2019 was in fact an advance dividend payment for the next two years. Corporate Australia will have to tread carefully if they decide to go down this path.

PS. I am not a member of a SMSF or industry fund.

Thanks Steve

Quote, "Whilst I can easily factor in the impact of ALPs proposed changes, I would find it more difficult to predict changes to companies dividend cover and dividend payout ratios in recessionary times"

Nobody can predict the changes of dividend policy, I dare say not even you, unless you are on the board.

Steve, are you in receipt of a Define Benefit Fund Pension ?

How will these changes impact your pension ?

That would explain a lot.

I hope Bowen rues the day he suggested to retirees that they could vote against Labor because of their policy on franking credits. I further hope that the balance of votes in the Senate can prevent such bad policy becoming law.

How stupid are Shorten and Bowen, inviting those who will be impacted by the Franking theft, to vote against the Labor party when many of their own legion of voters are affected?

"the balance of votes in the Senate"

The days of governing parties having a compliant Senate are uncommon at best and this has been very obvious with the current Coalition government. The Gillard/2nd Rudd government was lucky enough to get a majority of Labor/Greens in Tasmania in successive elections to give it a Senate majority after the second election.

Labor/Greens will be starting from behind with the continuing Senators from the 2016 election and would require an unprecedented result to get an overall majority after the 2019 election.

Why would there be a substantial reduction in Share fund utilisation? There's near no safe options outside it that produce ROI better than inflation. Will still be better off in shares even if there's a slight reduction in returns, & note well that it's only a minor percentage of returns..
By far the bigger issue atm is macro economic stability. it's obfuscating & false to not consider that aspect is harming shareholders much more than any adjustments that the ALP might make..

"a slight reduction in returns"

Yeah I guess a 30% reduction for those with a zero marginal tax rate is "slight".

My brother-in-law once said why didn't I put a certain investment asset through my SMSF. My reply was I believe that one day SMSF will be a sovereign risk. This is now beginning to ring true.

Surely the cost of pension to the gov't, should be encouraging every Australian to become self funded in retirement age. This will bring a significant cost off the annual budget.

Is this also a means for them in encouraging people back into main stream Super funds - namely industry superfunds so they can invest further in companies and get seats at the boardroom and then pull the company through the union ringer.

This is a fascinating and it will be interesting if they end up losing the unlosable election over this policy.

They want to stop greedy people from double dipping .This was never meant to happen but as usual certain people always get to greedy.

Opponents of Labor's policy seem to like to give the impression that it will be Ma and Pa Kettle living on the poverty line who will be most affected by the changes. This is misleading because assets in pension (or accumulation) phase do not form part of taxable income. So you can have a retiree with $1.6m in pension phase paying no tax with little or no taxable income as all assets are in Super environment.

IF SMSF's with heavy overweights to bank shares are forced to diversify into asset classes this will ultimately be a good thing. Investing for tax concessions is sub-optimal and has resulted in your typical SMSF portfolio with lower returns and higher volatility than would otherwise be the case with a more balanced portfolio with less home bias.

The hyberbole seems to reach a new high every week. Loss of refunds when all said and done will knock off around 1.5% from div yield of fully franked shares. You can make this up by simply investing in other asset classes other than ASX20 stocks and cash.

It's hard to predict behaviourally how the market will react to the changes. But equally it must have been hard to predict that so many investors would over-concentrate their investments in a handful of stocks for the 'feel-good effect' of receiving franking credit rebates while failing to notice their portfolios getting belted all over the place due to inadequate diversification.

"This is misleading"

You're doing exactly the same except in the opposite direction with your cherry-pick:

"you can have a retiree with $1.6m"

There is nothing wrong with complaining about people with $1.6m in investment assets not paying any tax on their investment income. But that is no justification for applying the same treatment to people who have far less than $1.6m which is the Labor Party's policy, i.e. the Labor Party policy is almost completely lacking in vertical equity and will apply the same tax treatment to even $1 of dividend income as to $100,000.

The Labor Party says it believes in the principle of vertical tax equity but this policy is an abject failure of vertical equity.

No it's not and here's why.

"Taxable income" does not include the largest source of income for many retirees: superannuation. To infer that those most affected are on low "taxable incomes" is making out that those hardest hit by this are poor and have low levels of assets. When you pare super withdrawals out of income data for retirees, almost half the wealthiest 10% over 65 report incomes less than $18,200 tax-free threshold (Grattan). This is misleading..

Almost a quarter of refunds claimed in 2014-15 went to 33,761 SMSF's with balances over $2.4m. In the same year the value of franking credit rebates was $5.9b. The largest portion ($2.6bn) went to SMSF's.

Yes there will be individuals with low levels of assets caught up in this but decisions in this regard must be made for the greater good. When the change allowing cash refunds was introduced it cost $550m. It now c costs $5.9bn a year (2014-15) This is a huge impost on the budget that is no longer sustainable. It's not enough that both earnings and pension payments are tax free plus other offsets like SAPTO/LITO where retirees can earn up to ~$30,000 outside Super tax-free. You want negative tax as well by exploiting anomaly in the Australian (and internationally) tax system?

Perhaps you'd like the shirt off the back of the younger tax-paying generation right before you sell us your overpriced house..

Before getting too worked up about the 'income' that people with $1.6 mn are getting, please read the article I wrote about how much tax has already been paid on the capital that will be drawn up during retirement: https://cuffelinks.com.au/zero-tax-rate-pensions-right-fair/

Most of the money that people will receive as their cash flow in retirement from that $1.6 million in their fund is capital withdrawals on which plenty of tax has been paid on the way in. You don't tax people when they take money out of the bank, so they shouldn't be taxed when they draw down what they've contributed into their super.

In the comments section on my article someone was aghast that I thought I needed to point this out. But clearly it does need to be pointed out.

"No it’s not"

You can't deny that you made a blatant cherry-pick:

“you can have a retiree with $1.6m”

And you reject the principle of vertical equity when you say:

"decisions in this regard must be made for the greater good"

Using your argument of "the greater good", we should get rid of progressive taxation entirely and just have a flat 30% tax on everyone. Progressive taxation adversely affects the greater good of GDP hence should be done away with. So "the greater good" argument is just ridiculous. It rejects the principle of vertical equity. You might reject that principle but the Labor Party claims they believe in it.

"This is a huge impost on the budget that is no longer sustainable."

Superannuation concessions (which mainly go to the well-off) cost far more but the Labor Party would never hurt its baby.

"It’s not enough that both earnings and pension payments are tax free"

So where was the campaign against outrageous superannuation tax concessions? You don't fix one thing by breaking something else.

"negative tax"

There is no such thing as negative tax. The tax office says:

"It is called an imputation system because the tax paid by a company may be imputed or attributed to the shareholders." i.e. the word "imputed" means shareholders are treated as if they themselves paid their company's tax. https://www.ato.gov.au/Forms/You-and-your-shares-2013-14/?page=5

"you’d like the shirt off the back of the younger tax-paying generation"

Being part of the older tax-paying generation I just want to pay the same tax as anyone else. The Labor Party thinks that isn't enough.

I used the $1.6m of assets in pension phase merely as an example to show that someone with this level of assets can have a low 'taxable income' and not actually poor. Let's not get bogged down in semantics. The point was that an outsized proportion of franking credits are claimed by large SMSF's. I’m happy to revisit this if you don’t understand the PBO figures.
I have never heard of the term vertical equity but will investigate. I actually don't necessarily think Labor's proposal is the best option available. A more equitable policy would be to introduce a tax on pension income paid out or on earnings within Super. But you and I both know there would be a similar uproar as the 'greater good' will always lose out to 'self-interest'. Cuffelinks weekly forums (or echo chambers) are testament to this. Refunds should indeed be scrapped across the board and not just permitted for those who don't claim an Aged Pension. I often here the 'Industry Fund' card being played and how Labor is favouring them with this policy. The simple fact is that Industry Funds by their nature generate sufficient taxable income via contributions/earnings tax from those in accumulation phase to offset franking credits against. So here we are with an imperfect policy that will still raise billions for better use.
I agree that Super concessions are not ideal so there is common ground. A flat tax of 15% means that larger benefits accrue to higher earners and those that are wealthy (sound familiar?) A rebate of 15% on marginal tax rates for contributions would perhaps make the system more equitable.
I don't care what you want to call it but the system of refunding unused franking credits is perverse, costly and more about gaming the tax system than sensible investing. People act like it's been baked into the tax code for 100's of years. Actually it was introduced by Howard in 2001 I believe as a sop to the grey vote. Imputation is the exception rather than the rule globally for a reason.
Regards your last point, the problem is that many seniors now pay less tax than younger workers on the same income due to the myriad of tax concessions including SAPTO, a higher Medicare Levy income threshold. Plus add in higher rebate on health insuers and it quite the gravy train. This has meant the proportion of seniors paying tax has almost halved in 20 yrs, with those over 65 paying less tax at a household level in real terms than seniors did 20 yrs ago despite rising incomes and participation rates. It’s time to address these imbalances.

"I used the $1.6m of assets in pension phase merely as an example"

Yes and it's a cherry-picked example and ignores all other examples to support a biassed argument.

"an outsized proportion of franking credits are claimed by large SMSF’s."

No-one is disputing that and trying to make a point of it is just a strawman. The problem is that you completely ignore the principle of vertical equity (indeed you reject it) which means that the much larger number of people who claim relatively small amounts of franking credits get the same harsh tax treatment as you're arguing for the funds getting most of the value of franking credits.

This is what the Labor Party says they believe about vertical equity:

"Principles of fairness include:

Vertical equity, meaning that taxpayers on higher incomes pay a progressively higher rate of tax;"

https://www.alp.org.au/media/1276/2018_alp_national_platform_-_consultation_draft.pdf

"But you and I both know there would be a similar uproar"

Getting rid of income tax on super pensions in 2007 was the solution of a non-problem which completely abolished the principle of vertical equity from superannuation. At least the Labor Party would not be hypocrites if they reversed this change and they wouldn't be affecting anywhere near the number of people. So "similar uproar"? I don't think so.

Making pension funds pay 15% tax like super funds also seems to be an obvious change to me. The excuse for 0% tax rate was motivation for having to take pension out of the fund but doesn't reducing the tax rate on something provide incentive to keep as much there as possible? It's a perverse incentive.

"The simple fact is that Industry Funds by their nature generate sufficient taxable income via contributions/earnings tax from those in accumulation phase to offset franking credits against."

No one is denying that. But if the Labor Party was honest then it would disallow the trading of franking credits for contributions tax within funds and thus raise vastly more revenue.

"an imperfect policy"

Not just imperfect. Wrong in principle.

"that will still raise billions for better use"

Raising extra tax revenue is no excuse for destroying principles of income tax equity. The government can raise extra tax if it wants to but do it while maintaining vertical and horizontal equity.

"A flat tax of 15% means that larger benefits accrue to higher earners"

Indeed, as I mentioned above, superannuation is a failure at vertical equity and the last skerric of vertical equity was removed by Costello in 2007.

"more about gaming the tax system than sensible investing"

Getting genuine credit for withholding tax on your business income has nothing to do "gaming" the tax system. It is merely part of the income generated by the business you own. Sensible investing is based on income generated by a business, not by how the government organizes its tax system of business income.

"People act like it’s been baked into the tax code for 100’s of years."

People act like non-refundable imputation has been baked into the tax code for 100’s of years actually. They also act like company taxation has been baked into the tax code for 100’s of years too. Non-refundable imputation was actually there for less time than any other company tax arrangement. People aren't actually using history as an argument for non-conditional imputation, they're just using principle.

"Actually it was introduced by Howard in 2001 I believe as a sop to the grey vote."

Actually it was bi-partisan policy: http://pandora.nla.gov.au/nph-wb/19981012130000/http://www.alp.org.au/campaign/policy/betterplans/tax.html#refund . You can trust a Party that can't make up its mind if you want to.

"Imputation is the exception rather than the rule globally for a reason."

EU countries have given it up because of attempts at economic union and a loose version of tax uniformity (that still inconsistently keeps countries' taxation separate). Not exactly a roaring success https://en.wikipedia.org/wiki/Brexit

"the problem is that many seniors now pay less tax than younger workers on the same income due to the myriad of tax concessions including SAPTO"

So you think the solution to that problem is to leave the vast majority of Seniors still getting their concessions (leaving the problem intact in the vast majority of cases) and "fix" a small part of the problem by breaking the tax system with a shotgun approach that causes a lot of collateral damage as well?

If you think that then you're just kowtowing to the Labor Party.

Christopher it’s ironic how you accuse me of cherry-picking when you ‘cherry pick’ an excerpt from a sentence without including its wider context. I never said there would be no collateral damage. AGAIN, it was to point out the clever obfuscation used by defenders of the current system to make out it will be the poor and destitute on ‘low incomes’ who will be caught up in this policy. For me it’s about the $ value of taxes and revenues and less about how long the tail is of the distribution.

Let me try your approach of copying and pasting excerpts for ease of reference.

“an outsized proportion of franking credits are claimed by large SMSF’s.”

Actually the breakdown of franking credits claims according to level of wealth are rarely depicted so I would challenge this assertion. Most of the opinion pieces on this topic like to lead in with the ‘low taxable income’ angle while de-emphasising the fact that this excludes account-based pension income.

“The problem is that you completely ignore the principle of vertical equity (indeed you reject it) which means that the much larger number of people who claim relatively small amounts of franking credits get the same harsh tax treatment as you’re arguing for the funds getting most of the value of franking credits”

I said I would look into it, not reject it. Let’s put that down to an oversight shall we? Yes Christopher there will be a meaningful number of people who claim small amounts of franking credits. In saying that, it would seem logical that those who claim small amounts of franking credits would also have smaller Australian shares portfolios. We could surmise, therefore, that such retirees may be receiving either a part of full Aged Pension and would qualify to receive franking credit refunds. I’ll admit it was a knee-jerk reaction by Labor to introduce that caveat, but it arguably softens the blow for the less wealthy (nothing to do with ‘taxable incomes’).

“At least the Labor Party would not be hypocrites if they reversed this change and they wouldn’t be affecting anywhere near the number of people. So “similar uproar”? I don’t think so.”

We can agree to disagree on this one. Somehow I think this is less about the principle of enshrining the underling tax rate of the end investor and more about the fact that there will be a reduction in portfolio income. If a flat 15% tax was applied to either income payments or earnings in Super, the tax impact would be larger as would be the protests from well-heeled retirees my dear Christopher.

“Making pension funds pay 15% tax like super funds also seems to be an obvious change to me. The excuse for 0% tax rate was motivation for having to take pension out of the fund but doesn’t reducing the tax rate on something provide incentive to keep as much there as possible? It’s a perverse incentive.”
Yes. It was clear that Super was being increasingly used as an Estate Planning vehicle so this argument has some merit. A key reason behind the introduction of the $1.6m cap.

“No one is denying that. But if the Labor Party was honest then it would disallow the trading of franking credits for contributions tax within funds and thus raise vastly more revenue.”

Labor wan to reset the policy to it’s original design which was to avoid double taxation. It is therefore reasonable taking this approach to allow tax structures with sufficient taxable income to use utilise franking credits.

“Not just imperfect. Wrong in principle.”

It’s wrong if you’re a retiree that has come to think of franking credit refunds as an inalienable right as opposed to a privilege.

“Getting genuine credit for withholding tax on your business income has nothing to do “gaming” the tax system. It is merely part of the income generated by the business you own. Sensible investing is based on income generated by a business, not by how the government organizes its tax system of business income.”

I can’t tell you the number of SMSF Trustee portfolios I have come across that comprise of a concentrated portfolio of ASX20 shares and some cash/TD’s. This is poor portfolio construction and upon investigation it’s often the case that investment decisions have been driven by tax reasons with no consideration for appropriate diversification and optimal risk-adjusted returns.

“EU countries have given it up because of attempts at economic union and a loose version of tax uniformity (that still inconsistently keeps countries’ taxation separate). Not exactly a roaring success https://en.wikipedia.org/wiki/Brexit”

I think this is more an attempt to refute every single thing I said rather than come up with a cogent response as to why so few other countries adopt Australia’s franking credit policy in its current form.

“So you think the solution to that problem is to leave the vast majority of Seniors still getting their concessions (leaving the problem intact in the vast majority of cases)”

No. As previously mentioned Christopher I don’t think this is the most optimal solution out there. But if it’s the only one on the table I will take it. I love hearing all these retorts by vested interests about needing to consider any changes against broader tax policy, knowing full well this unlikely to occur for a raft of reasons. A fairly transparent ploy to maintain the status quo.

“If you think that then you’re just kowtowing to the Labor Party.”

I’m a centrist that judges each party’s policy on its merits. I will go out on a limb here and say you’re a lifelong Liberal voter, so unlikely Labor loses any market share with your vote.

Dane: You say the imputation system is "a huge impost on the budget that is no longer sustainable." I say the $18,200 tax-free threshold is also unsustainable. If you want to revert to the pre-2001 status quo, then remove FC cash refunds and reduce the TFT to $5400 which is where it was before Howard introduced the changes, which were, by the way, was to compensate GST effects. At the time, then Shadow Treasurer, Simon Crean said Labor was fully in support of the cash refunds because it was actually Labor policy. (See Hansard). As well as cash refunds, TFT was raised to $6000 and other family benefits introduced "as a sop" to the non-retirees. In 2012/13, Labor raised the TFT to a whopping $18,200. Yes. everyone can earn $18200 TAX FREE. Except under Labor, self-funded pensioners will be taxed at the company rate of 30%. Treasury/PBO docs confirm this. (See ABC RMIT fact check article)

Dane it’s ironic how you accuse me of not including wider context when you ignored how this policy would affect the much larger number of people with far less than $1.6 million in superannuation. And I never said you never said there would be no collateral damage. I just pointed out the fact that you didn't have a problem with collateral damage. An entirely different point.

I have never denied that a lot of self-funded retirees have net incomes higher than taxable incomes and that a few of them have large incomes but the proponents (including yourself) argue as if these are the only people that matter and that everyone else regardless of how little they receive should take a hit for the team. Sorry that you don't give a damn about vertical equity and aren't particularly interested in what it even means. You appear to be far more interested in arguing from ignorance than going away and learning about the subject you're arguing first.

"“an outsized proportion of franking credits are claimed by large SMSF’s.”

Actually the breakdown of franking credits claims according to level of wealth are rarely depicted so I would challenge this assertion. "

Well you claimed it so if you want to challenge your own assertions then go ahead and let us know the outcome.

"I said I would look into it, not reject it (vertical equity)."

No you already rejected it (the principle) by saying:

"Yes there will be individuals with low levels of assets caught up in this but decisions in this regard must be made for the greater good."

"We could surmise, therefore, that such retirees may be receiving either a part of full Aged Pension and would qualify to receive franking credit refunds."

Like the Labor Party, you are ignoring the many thousands of people who are too young to retire or get Age pension but are receiving franking credit refunds. The Labor Party appallingly doesn't care about these people (and you either apparently).

The Labor party hasn't said anything about how they will deal with the "sudden death" in their means test where someone will lose thousands a year in tax credit refunds when their pension drops from $1 a fortnight to $0 a fortnight.

"We can agree to disagree on this one."

So you think reintroducing progressive taxation to superannuation pensions would generate the same uproar as imposing a heavy flat tax? If that's what you want to believe....

"If a flat 15% tax was applied to either income payments"

What? I guess this is the problem with arguing with someone who doesn't know history. I didn't say applying flat tax to super pensions. I said re-introducing income tax on super pensions as existed before 2007. Progressive taxation that you appear to have been completely unaware of.

"Labor wan to reset the policy to it’s original design which was to avoid double taxation."

Or much more accurately, to give shareholders credit for tax that is effectively already imposed on them.

"It is therefore reasonable taking this approach to allow tax structures with sufficient taxable income to use utilise franking credits."

That's a non-sequitur. Tax imputation and trust law are based on completely independent principles. You're just providing an excuse for the Labor Party to be dishonest.

Confiscating withholding tax that shareholders are imputed to pay is not an imperfect policy, it's just plain wrong in principle.

"This is poor portfolio construction"

OK. So now your argument has shifted from gaming the system to claiming poor portfolio construction. Good to see your methods include moving the goalposts. Investment decisions should be based on principled tax law. You can spare us your investment advice by the way.

"I think this is more an attempt to"

I don't care what you think. I was just pointing out the fact that your bandwagon argument for doing something is a very poor argument. Arguments should be based on principles and their merits, not on what lots of other people are doing in their own unique and chaotic circumstances.

"“So you think the solution to that problem is to leave the vast majority of Seniors still getting their concessions (leaving the problem intact in the vast majority of cases)”

No."

So why aren't you advocating for that?

"I don’t think this is the most optimal solution out there."

Understatement of the century. More accurately, it's total garbage dressed up as a so-called solution.

"if it’s the only one on the table"

Why is it the only thing that the Labor Party has put up? Why was the Labor Party happy to flag through tax-free super pensions in 2007 and why was it happy to let them continue all through its period in government and then suddenly in 2018 it says "isn't it awful that $1.6 million pension funds (which we are more than happy to not tax on all types of income except one) are refunded tax (that they are imputed to pay) on one, and only one, type of income?

Totally disingenuous and pure political calculus.

"broader tax policy"

This is the opposite of broader tax policy. Broader tax policy considers how much people are taxed on all their income including superannuation pension income (for which the Labor Party has been as much a failure as the Coalition). Broader tax policy is not about picking out one type of income for harsh treatment.

"I’m a centrist"

You would say that wouldn't you? https://en.wikipedia.org/wiki/Mandy_Rice-Davies

"I will go out on a limb here"

So much for that limb. Lifelong Labor voters (and swinging voters too) have to ask themselves how much Labor's other policies matter if Labor's plan is to rob them of their own money. The Coalition got a lot of mileage out of claiming (incorrectly) that households were $550 a year worse off because of the Carbon tax so even just this much money matters a lot in political choices. I have spent a lot of time over the years arguing against Greens advocates that the Labor Party's Carbon emission reduction policies were never less effective than what the Greens wanted. (Greens policies are based on ideological purity of the day.) So that matters to me but it's not an excuse for robbing people.

I get the impression only one of us is currently working (and paying taxes!!) so I will respectfully bow out at this point, given the opportunity cost on my time from continuing this debate. Appears to be very little in the way of new information coming to light at this point, More just different interpretations.

I will say I've learnt some things and rather enjoy testing my beliefs against other point of views. I would hope you do the same although seniors have a propensity to be rather dogmatic into their old age so I suspect your beliefs are entrenched.

P.S If you can point me towards any great investment thinker who suggests structuring investments based predominantly on 'principled tax law' I would very much like to read their work...

Thank you for finishing with a personal attack. It's a good summary of the quality of your argument.

Political Parties of all persuasions will always devise the means to take from us.
They will throw "grenades" at us in the form of arguments that have the intended consequences of dividing us.
What we, their Masters, need is a voice to fight back.
Our mass media has been watered down to the point it is ineffective.
Imagine if our voice was to be heard....particularly if we demand changes to their over generous pensions and allowances before they embark on their robbing Peter to pay themselves crusade.

Why stop at no refunds of a shareholders share of company tax over paid on dividends (through franking credits imputed to shareholders)?

Why not withhold also 30% tax from wages with no refund of tax over paid?

The 0% and 19% tax bands would be obsolete.

What I find amusing is Shorten & Bowen have both admitted that industry funds have used franking credits from pension fund accounts to offset the tax liabilities of accumulation funds because it is to "hard" to separate the tax liabilities of each fund. What a load of crap. Lets have an enquiry as to why this is allowed. Are pension funds subsidising accumulation funds .

I will be viewed by some as one of those 'bleating' about franking credits being taken. A simple concept to understand, Labor are saying they want to tax the rich but only talk of excess franking credits - is this because it is called a tax, their ploy will not work as retirees over 60 pay no tax! Strike 1?
Those with above $1.6 M in super, I suspect are the RICH and while they lose their pension phase franking credits, their accumulation phase franking credits will be taxed at 15% and the other 15% will be placed in their account. They get to keep a portion (not clear what their actual value is) of their franking credits but I and many others, who are poorer don't. Taxing the rich - not really! Strike 2?
The ATO's view on franking credits is that they are both income and tax paid on my behalf. If I pay no tax then, surely this can only be viewed as income. So Labor want to take my income off me. Unless the Liberal party's law is changed, how can Labor take my franking credits? Strike 3?
I guess that Labor aren't interested in '3 strikes and you're out' or any sensible discussion or reply to emails or have any interest in treating the people who elect them in a fair, transparent and non-discriminatory way. When people are not treated in the same way it is discrimination, is it not? Strike 4?
I guess Labor don't like rules or need to follow laws that already exist, provided they can brand things differently and use 'haves versus have nots' to 'justify' their actions. Strike 4?
All of this is is my opinion but I would like to know where I am wrong.

Dear Cuffelinks

I’ve been following your series on franking credits on and off. It’s a buggers’ muddle for the layman but most of the articles from contributors have been fairly clear and helpful. Thankyou.

I want to make only a couple of points.

None of your articles that I have seen alludes to the purpose of superannuation. I know Labor policy has effects beyond super so I’m basically on this point dealing with SMSFs. My understanding is that the purpose of super is to provide financial means for one’s “post-working” life. At its purest, one’s super would in principle be exhausted at death and the last penny of it would pay for one’s funeral. Super schemes, such as SMSFs, from the government point of view are to make savers independent and to relieve government of caring financially for oldies by means of pensions. To the contrary, all us smarties have seen having an SMSF as a wealth-creating instrument which one can use to be the richest person in the cemetery. We have perverted SMSFs and made them too much of a good thing: hence $1.6m caps (a non-Labor restraint Of the millionaires among us) and other non-Labor measures and proposed Labor measures. One might suspect that most of the present uproar against Labor proposals is coming from people who see their SMSFs more as vehicles for wealth creation than as strictly superannuation, they are lamenting as investors in a tax-advantaged haven more than as superannuants. The few bottom-feeding pensioners lucky or smart enough to have SMSFs are to be looked after as “real” superannuants by Labor’s exclusions.

That said, there are questions of equity which are a hard-sell for Labor – your articles deal fairly well with those.

My second point is the misrepresentation of Labor proposals in the press, including Fairfax, the Oz and less responsible banners. It is ubiquitous, whether from ignorance and misunderstanding, carelessness, bias or wilful intent. Labor is on a hiding to nothing on franking credits unless it gets out and sells its policy, including its latter-day exclusions in favour of pensioners etc, clearly. Labor has apparently made the judgment that most franking credit shareholders are not natural Labor voters but the messy debate has gone feral and wide and has gone political way beyond what might have been expected.

I’m not a Labor or Coalition voter and I closed my SMSF some time back, for reasons other than franking credits, in favour of an industry fund.

I think you can see from other comments that many people are not wealthy, they have a modest-sized SMSF but are not pensioners. They are proudly self-funded and the receipt of franking credits was a major part of their income.

I'm sure some of these will object to your characterisation of their retirement savings as a vehicle for wealth creation.

At the other extreme of very large SMSFs, they will not be affected by the Labor policy because they have taxable income from accumulation balances.

". They are proudly self-funded and the receipt of franking credits was a major part of their income."

Genuine question...if you rely on a cheque from the government to fund your retirement, which is a refund of tax that you never paid in the first place, can you call yourself self-funded?

"which is a refund of tax that you never paid in the first place"

This amounts to claiming the tax office is a liar:

"It is called an imputation system because <b>the tax paid by a company may be imputed or attributed to the shareholders</b>."

https://www.ato.gov.au/Forms/You-and-your-shares-2013-14/?page=5

Shorten and Bowen have been very successful at fomenting discontent with their blatant dishonesty.

"The few bottom-feeding pensioners lucky or smart enough to have SMSFs are to be looked after as “real” superannuants by Labor’s exclusions."

Only if they were getting an Age pension before 28th March 2018. As these people die off there will be fewer and fewer such people "looked after" as time goes by.

"Labor has apparently made the judgment that most franking credit shareholders are not natural Labor voters"

Indeed that's what Bowen means when he says the policy is "well targeted". Little or nothing to do with equity, just political calculus.

"but the messy debate has gone feral and wide and has gone political way beyond what might have been expected"

Who would have expected people might not like being robbed of their money? As the tax office points out:

"It is called an imputation system because <i>the tax paid by a company may be imputed or attributed to the shareholders</i>."

https://www.ato.gov.au/Forms/You-and-your-shares-2013-14/?page=5

Christopher O'N: You are correct: The tax has been paid by the company. Here's what Treasury says (Doc 22): Treasury doc 22:
"The refundability of franking credits allows a refund of excess franking credits for entities whose tax liability has been reduced to zero. Providing refundability of franking credits allows taxpayers with a marginal tax rate below the company tax rate to receive a refund of tax paid by the company. This means, in effect, that the tax paid by the company is equal to the marginal rate of the taxpayer. In the absence of refundability, the taxpayer would, in effect, still pay tax at the company rate with any surplus franking credits wasted."

And, Treasury says: ""[Labor's claim that] more than half of the cash refunds go to self-managed super with balances of more than $2.5 million and 82% goes to balances of more than $1million -- [is] INCORRECT although the ALP may be referring to the proportion of payments to super funds that go to SMSFs, we don't have this figure available."

Alfred in on the money...no one in the labor movement loses while they still enrol people in life insurance despite people saying no. Two out of two for my sons in an industry fund. They totally ignored the registration request and options selected.

I reject Pat Connelans own form of bleating. I don't need him/her telling me we are making the system unworkable.
We are husband and wife SMSF owners and worked all our lives to be self supporting and independent. It does not make us rich, we are far from it. In fact we have an income typically about the same as a pensioner couple. But we have a modest holiday home asset that makes us non pensionable. WE GET NO Govt OR PENSIONER SUPPORT OF ANY DESCRIPTION. WE COST THE Govt NOTHING.
But we are surrounded by people who have engineered their financial lives to become pensioners. Some 'spent the lot' travelling, or upgrading homes etc to make sure of it. They will continue to get the franking credits, whilst people like us, intending all our lives to do the 'right thing' will be cut off. Of course not every pensioner did this but anyone who thinks it has not been the accounting industry mantra for many years is surely deaf.
I am 74 and voted Labour all my life, but no this lot. I am sick and tired of class warfare promoters that catch innocents like us in the crossfire. Treating anyone with self means as super rich and grasping.
And as for Bowen, he is like a clockwork doll with built in default mode to ignore everything and make the rich pay, and who cares if they are not rich. They must be and we are going to get them.

Re the statement above "The impact will be felt mostly by self-funded retirees and SMSFs, while those with an institutional super account will be largely unaffected."

Could this be a cunning ploy to get people to move to industry super funds where it may, in the future, be easier for government to get their hands on some of the money, for example by introducing the purchase of compulsory whole or part annuity pensions. Then the government can take some or all of the residual money when the pensioner dies?????

Excellent article Deborah. There have been so many articles written about this policy by well credentialed experts that we can take as fact that this is poor policy.
I read these comments to try to gain some knowledge about how people will react to the policy change, and where they are likely to move their money. It is incumbent on SMSF trustees to maximise returns, so trying to predict disruption to markets is important. Companies have already started changing the way they operate and I expect many changes if this policy is enacted.

I think Robert Gottliebsen summed up the discrimination inherent in this policy very well:
Bowen is dividing retirees with exactly the same assets and income into two baskets - those who receive cash franking credits and those who do not. Those with their assets invested with industry and retail funds will receive the credits; the rest miss out. Quote: "Taxing people on the basis of who manages their money is without precedent in the developed world." (The Australian, 23/1)

Interestingly, appears it already happens. Largely due to the 45 day rule with pooled funds, mixing investors in Accumulation and Pension modes, the full franking credits usually do not flow through to retirees in Industry or Retail funds - they will have different crediting rates and different arrangements with the ATO. It is complex and anything but transparent but there is "leakage"

SMSF's and IMA's currently get 100% flow through of franking, others do not always but it is extraordinarily hard to pick the numbers apart

"they will have different crediting rates and different arrangements with the ATO"

A super/pension fund is a trust with a single tax return for the entire trust. Thus trust income from dividends, franking credits, contributions, rent, capital gains etc, attributable to many different members, all gets lumped into the one tax return. The only thing that affects the fund's tax rate is the fraction of income attributable to pension members.

How much each member is credited is up to the trustee but should bear some relationship to the net income attributable to the member.

Chris Bowen won't respond to any question that asks if he thinks its fair someone moving their super money from one fund to another gets a different tax outcome.

Follow Fund Managers for stock picks?
If they can pick stocks they know will be winners, no need to diversify their portfolios and massive profits will flow into their funds. How often do we see this?
Many years ago, researchers found that in the predicting business, weather, races and all other predictions, the success rate was ~ 32%. Can we predict earthquakes, and other natural disasters accurately, accurately predict Govt interventions, especially in 3rd world countries, or changes in consumer or investor sentiment? These events can be high profit or loss scenarios for investors but for most people, being there is fortuitous, not good management.
On the other hand, some investors particularly good business managers, and some active fund managers are able to influence the future positively for their investment. They read the near-term future and try to adapt that future, or their own activities to make their position positive.
The rest of us can only look on in wonderment from hindsight , wishing we could have been there.

My view is very simple......

I have played by the rules of govt all my life and invested as allowed and encouraged to do so. Hence I believe that any future change in policy should come with a non-retrospecivity clause, just like CGT did when it was introduced.

The $1.6mil cap isssue was not made non-retrospective and hence law-abiding investors under the old policy were forced into all sorts of redistributions and work arounds due to no fault of their own. That policy should also have had a non-reptrospectivity clause.

Govts have the right to change policies, but all I ask is that those who legally invested under the previous Govt's policies are not now disadvantaged under the new.

Disadvantaged investors will no doubt vote with their feet. Maybe because they think us pensioners don't matter, they can afford to upset us.

Not only is this a "change of rules" it looks like it can create a situation where identical portfolios could have different after tax results [incl franking] depending on the structure where those assets are held and that is not right. If Members of Industry Funds in retirement, get all or part of the franking credit via different "crediting rates" and Members of SMSF's get zip, the concept is ethically bankrupt in addition to being a breach of faith [again] for retired Australians!

The grey tsunami can’t be ignored.

The self-interested industry bleating over this issue is a wonder to behold. The fact is, as Professor Ken Davis is quoted as saying in The Australian today, dividend imputation was not intended to lead to zero taxation of corporate income which occurs when dividends are paid to investors on zero marginal tax rates and rebates paid. The other issue, as the article shows, is it is distorting older Australians' asset allocation leading them to hold concentrated portfolios and seeking to game dividend payments by breaching the 45-day rule. The tail is wagging the dog, the system is unaffordable and it is creating massive distortions in the financial system. Why doesn't Cuffelinks represent an alternative view on this issue instead of constantly singing from the hymn book of industry rent-seekers??

Hi Pat, on why don't we publish opposing views, we can only publish what we receive. We have not knocked back any article where someone has articulated an opposing view in a well-reasoned way (in fact, in any way). Cheers, Graham

Doubt Davis source for his comment. Was not established by Ralph Business Review that clearly allowed full refunds.

Hi Pat, thanks for your comment. I guess it depends on what you mean by a vested interest. Should the ALP policy come into being it will not make a $1 of difference to me. Like my colleague Kevin Davis I am in receipt of a UniSuper (industry fund) pension which will be totally unaffected by the proposal. My husband on the other hand has a similar size pension in our family SMSF - he will be considerably worse off. I also get many letters and emails from self-funded retirees and SMSF trustees who have invested in Australian equities in order to be independent in their retirement . They feel very let down. Dividend imputation has certainly helped to build a strong domestic capital market, but it has created a few distortions in terms of a strong home bias for investors and a disincentive for Australian companies to invest off-shore. In 2012 the Henry review suggested that the dividend imputation system be reviewed in the longer term, but this type of inequitable policy is not the way to do it.

Pat Connelan raises 'self interest' but appears blind to the ALP's self interest in ensuring a flow of funds out of SMSFs into particularly Union controlled industry funds that can then 'clip the ticket' to channel funds in support of the ALP!

Davis' comment is nothing more than opinion. There is no evidence to back it up. Indeed, the contrary is true. Labor took this policy to an election and when the Liberals won it was passed with Labor support. So it was parliament's clear intention to create zero taxation of corporate profits in certain circumstances.

"seeking to game dividend payments by breaching the 45-day rule"

One wonders why Pat Connelan resorts to accusations of criminal behaviour.

Small investors gaming the 45 day rule, Really!

Not rocket science to move Pension portfolios in SMSF's to offshore funds [taking on forex risk] and/or own Aussie companies with offshore exposure, good growth prospects and minimal franking. Bowen gets very little. On the other hand if SMSF's move to Industry Funds, Bowen also gets very little. Aussies are not stupid, they will change behaviour if they see Ned Kelly at the door

A substantial portion might end up in Australian REIT's, yet another real estate bubble..

I get international exposure for my SMSF through LICs. These mostly pay franked dividends. They tend to perform terribly when the $A is strong, introducing added volatility into the portfolio, rather than reducing it through diversification. I'd be surprised if SMSF trustees accustomed to local shares would enthusiastically trust their funds to overseas managers given the currency risk. They can't follow company news very easily and most of us don't read the reports we do get.

Labor wants people to switch to industry funds which indirectly look after Labor very nicely. Union reps acting as trustees are paid quite well. They traditionally split the fees with their unions who largely upstream the payments to Labor. I wouldn't mind if all super funds in pension paying mode were taxed equally but policies that aim to advantage Labor make me very angry. You will have noted Bowen's caution on the Productivity Commission's proposal to remove poorly performing managers including industry funds from the superannuation system. He is not going to bite the hand that feeds him.

SMSFs in accumulation phase who have a high Australian share ownership strategy will also have their so called excess franking credits confiscated by Labor . 30% franking vs 15% SMSF tax liability .

Taking a few profits will chew up any excess franking credits for established SMSFs. Newer SMSFs with a higher reliance on contributions for income might not be able to do this.