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March 15th 2018 print

Peter Smith

Thieves at the Door, Dolts in Residence

What kind of government-in-waiting turns on elderly citizens relying on their modest nest eggs to survive, especially in such a calculating, predatory and vindictive way? Worse, what sort of government-in-power opens the door for that successor administration to loot and pillage?

cat foodEmboldened by the polls and a feckless government, nothing stands between Bill Shorten and pillaging a pot of retirees’ money. He’s on a winner, he thinks, with no political opposition worth spit.  If he’s right, the future for Australia is bleak. We have to go back to 2013 to set the scene.

You will recall the platform that took Tony Abbott to victory in 2013. Stop the boats was, I think. the most persuasive part. But up there too was ‘axe the taxes’ (on carbon and mining companies). Axing taxes we soon learnt to read narrowly, as Abbott, with the inept assistance of Joe Hockey, proceeded to try to impose a range of new imposts, including on poor people visiting the doctor and on old-age pensioners. None of this had been signalled ahead of the election.

Abbott at the time was my local member. I wrote to him telling him as a supporter that these new “taxes” would bury him if he didn’t back off. Bury him they did. Since then the tax grab has gathered pace under Malcolm Turnbull and Scott Morrison. Before I go on I would like to remind you, to save confusion, that we don’t as yet have a Labor government. Reportedly, disconcertingly, we still have ‘low-taxing’ Liberals in charge.

To my mind two new taxes stand out. The first is the bank tax levied on the liabilities of the four majors and Macquarie. It is a discriminatory tax on the shareholders, customers and employees of the aforementioned banks with no rationale other than to raise revenue. That is not its biggest problem. Its biggest problem is that it opens a door. And you ain’t seen nothing yet. Expect any incoming Labor government to charge through with a vengeance. Big miners and big banks and big profits generally will be targeted. And on what principle precisely can the Liberals in opposition then object?

The second tax is the unconscionable halving of the pension taper rate which means that hundreds of thousands of retirees have had their part-pension reduced or eliminated entirely. Bear in mind that we are talking about people of modest wealth who had carefully arranged their affairs to avoid taking the full pension. Foolish people. Now many have been put in position of being better off by reducing their assets in whatever way they choose and going onto a full pension.

Why do I use the word unconscionable? Simple, unannounced and impoverishing changes to the financial position of part-pensioners, who have little or no scope to change course, is not a decent thing to do. With a touch less sympathy, I would also say that that removing the tax-free status of superannuants with more than $1.6 million in assets is unconscionable. It would be different if it were part of a general policy, announced in advance of an election, to increase the progressivity of taxes across the board. As it is, it is a tax grab from a few oldies who have no voting power to hit back. And, again, it opens a door.

This particular door is now already being kicked in by Shorten. The removal of the cash rebating of franking credits (tax paid by the company per dollar of dividend) will largely hit superannuants.

If you listen to the debate you get commentators who are onside with the decision saying that most other countries don’t have dividend imputation (franking) while adding that some very rich folk benefit enormously from the current arrangements. Both are true. Both are out of context and deflect, disingenuously or stupidly, from the harm that will be done to many vulnerable people.

Unlike Australia, many countries without imputation have lower corporate tax rates and, vitally, have universal old-age pensions. Older people in Australia of modest means, including me by the way, so I declare a vested interest, structure their affairs carefully in light of the current arrangements to ensure they can pay their bills. They will all be seriously affected and disadvantaged by the Shorten changes, with no good options available to them.

Let me give an example. Jill,  72, lives alone in a small flat which, thankfully, she owns. She is in a bind. She has $600,000 in superannuation, which excludes her from receiving any pension. She can get around 2.5 % interest but that leaves her with just $15,000 per year to live on. This is substantially less than the single old-age pension of $21,000.

She’s forced into shares. She keeps $100,000 in interest bearing assets and buys $500,000 worth of fully-franked shares on which she earns an average of around 4.5% in dividends, plus franking credits of another 1.9%. Her total annual income now comes to $34,500.

She has medical bills but lives prudently. She is able to take an occasional short holiday with a couple of friends from her bowling club. She is content with her lot. That is her position pre-Shorten.

Post-Shorten her annual income declines by $9.500 to $25,000. Her income declines by a whopping 28%. No more holidays for you, Jill, Shorten intones from the comforts of Kirribilli House shortly after his electoral walloping of Turnbull.  Jill is distraught with nowhere to turn and no one to turn to. Its winter’, she shuts off her gas heater and dons another jumper.

Too dramatic? I don’t think so. My example is not a stretch. There are many more people in Jill’s position or close to it than there are multimillionaires. If Shorten gets away with this cruel and unusual pillaging it will be yet another sign of a coming socialist republic. Is that a stretch?

Tell me, what kind of government is it that would turn on a group of its elderly citizens – relying on their own modest nest eggs to survive — in such a calculating, predatory, and vindictive way. (Adjectives fail me.)   And who have we got to push back politically. Only those whose record on capricious, unfair taxation set the agenda in the first place.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [16]

  1. Peter
    Your basic thesis is correct but (along with a lot of other commentators) your criticism of the Labor proposal to deny access to franking credit refunds for low income investors is flawed.
    Consider Jill in your article. She has $600,000 in superannuation which apparently translates into an annual income of $15,000 at 2.5% interest. No it doesn’t, unless Jill chooses to live off interest alone and leave $600,000 to her descendants. But the point about capital in superannuation is that you are supposed to live off the income AND THE CAPITAL. One of the (many) flaws in Australia’s superannuation system is that no-one knows for sure how long they will live. So they can’t optimise their lifetime income.
    Neither does Jill, but let’s give her 25 years, so she dies aged 97 – a good innings. Further assume that she decides to leave $100,000 to her family. And let’s assume that the interest she receives is 2.5% p.a. over this period which is equal to inflation, so zero real return. Under these circumstances she can draw down $20,000 per annum in real terms (i.e. inflation linked), not $15,000.This is close to the $21,000 old age pension and a handy 33% more than you indicate.
    Of course you could argue validly that under the Labor proposal Jill might as well blow the capital at the Hobart casino and live off the pension (also inflation-linked probably).
    There are plenty of reasons to criticize the Labor proposal (as well as Coalition policies on superannuation) – but we might as well got the numbers right.
    Kind regards
    David

    • Jody says:

      I don’t know what planet you’re living on. Peter is absolutely right. I run a medium sized superannuation fund which is a mixture of cash and Australian equities. The cost of auditing and the changes to imputation credits will mean a reduction in our income, right away, of $10,000. Fortunately we’ve kept money outside superannuation because of legislative risk and this proved to be right. But if Shorten is elected we will liquidate our super fund, buy a flasher house and then draw a part-pension (as I suspect many will do).

      But you are wrong suggesting you have to draw down CAPITAL. That capital is used to CREATE INCOME and each decrease in the yearly balance is a decrease in yearly income. My accountant and I are always looking at ways to maximize the capital in our fund just to maintain the PRESENT standard of living; it’s my job as a Trustee to MAXIMIZE RETURNS AND GROW THE FUND.

      Let’s look at Defined Benefits: judges, public servants, school teachers. Rich pickings indeed, linked to last job income and indexed to the CPI. This affects both sides of our extended family; school principals and deputies with working teaching wives. All 4 on indexed Defined Benefits and when one dies the other also gets a partial annuity from the deceased (irrespective of having their own separate ‘pension’). No mention is ever made of these people and the drain on the national purse – taxpayer funded,lucrative, perverse and never mentioned. We need to start talking about capital-gains free family homes with these people and ‘deeming rates’ of how much they’d need to have invested to earn well over $100,000 pa. And most have expensive homes they can leave to their families. No fear of that resource drying up as it does with self-funded retirees. The whole system is a bloody disgrace and we SMSF RETIREES need to be looking at a class action for “discrimination” on the basis that we are the sole pension group singled out for milking by government – and, apart from a select few, we are not NEARLY as well off as those on Defined Benefits. Remember the Future Fund? This was solely to provide money for Defined Benefits recipients now and into the future.

      • Salome says:

        Jody, the reality is that those who take the ‘pension’ rather than ‘lump sum’ option in public (i.e., not self-managed) super funds are expected to draw down on capital. Ideally, you have plenty to live on and nothing when you die (although they haven’t yet attacked the homes we in them, just lit a few fires around the perimeter). By the way, David, you haven’t factored in the fact that when Jill has depreciated capital sufficiently, the part pension will kick in.

    • ianl says:

      @ Davidrees

      Your analysis is flawed, I’m afraid. Look at this:

      > “She has $600,000 in superannuation which apparently translates into an annual income of $15,000 at 2.5% interest. No it doesn’t, unless Jill chooses to live off interest alone and leave $600,000 to her descendants”

      That is *your* quote, remember.

      So where is the income other than that $15k at 2.5% interest.

      Your next quote (as well as the “descendants” sneer), gives away your bias:

      > ” …the point about capital in superannuation is that you are supposed to live off the income AND THE CAPITAL”

      So, there *is* no extra income above the $15k, one has to spend the capital. So, your bias is against inheritance. Too obvious – and that bias is informed by envy. Shorten knows you much better than you know yourself.

      Oh, and dividends taxed at 30% mean the final franked (ie. taxed) amount received by the shareholder is 30% *smaller* than an untaxed return. So don’t come the “they’re paying no tax” excuse.

      Please get your numbers right.

      • Jody says:

        AND those final franked dividends being removed means the retiree (SMF) is paying tax on EVERY DOLLAR at 30 cents without a tax-free thresh-hold. Basic stuff. Unacceptable. Won’t stand.

        • Salome says:

          I agree with that. The tax the company pays the shareholder shouldn’t have to. That goes for all taxpayers on a marginal rate of less than 30c who have any share investment.

    • en passant says:

      David,
      David,
      Where did Jill get the ‘Magic Pudding’ $600,000 in the first place? Unless she won a lottery, it is likely that she forewent (is that a word?) part of her income for 40-years. This probably equates yo an average of $10,000year over 40 years. My first wage was $32/week plus I paid $1.50 into a superfund. From my last 6-figure+ income I paid 20%+ into my superfund. I paid tax on the way in so I could draw it out tax-free on the way out. I now have to start liquidating assets as the cashflow is not enough to provide for the minimum I MUST draw (and be dead {and broke} by 85).

      This country’s politicians are a disgrace as they have set up an entirely different (and highly lucrative) scheme for themselves, while impoverishing the rest of we proles.

    • PT says:

      You’re forgetting about inflation David. The current CPI is just under 2%. So inflation will significantly erode that $600,000 over 25 years, even if it stays below 2%, which isn’t likely given the deficit. Shorten will use it to spend on grand, legacy creating designs like the NDIS rather than balance the budget too.

  2. Jody says:

    My understanding is they get the annuity until the day they die and their spouse gets a portion thereafter – so it never runs out. The relatives I’ve mentioned are living high on the hog while the rest of us who are self-funded are continually the targets of tax grabs. The fact that there’s no mention of Defined Benefits and that they’re a protected species is where the appalling double standard lies.

  3. Zedaus says:

    Its a pity that commentators on Superannuation matters don’t know the technicalities. See the government link below to verify the withdrawal minimums at retirement.

    https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=8

    Age Under 65 65–74 75–79 80–84 85–89 90–94 95 plus
    Minimum % withdrawal 4% 5% 6% 7% 9% 11% 14%

    These percentages are based on the value of the Fund including the value of the shares held at the end of each financial year.

    Jill, at 72, MUST take a minimum pension of $30,000 from her Superfund of $600,000. In successive years her Fund will fall IF she maintains the $30,000 withdrawal. IF she maintains withdrawal at the statutory minimum, she will have less to spend. The withdrawal of Franking refunds will mean that her fund will not last as long as she hoped for. Add in inflation, her $30,000 will not buy as much into the future.

    Consideration of Jill’s finances is not simply a discussion on the effects of Franking refunds. Its about the disruption to her ongoing plans which Labour simply do not care about.

    • PT says:

      The ALP doesn’t care full stop. They were always chock full of ideologues wanting to remake the world. But from Keating on, they’ve abandoned their working class roots and are now a thoroughly “progressive” party! Albeit with the unions as a source of funds, behind the scenes hacks and jobs whilst in waiting for a parliamentary seat!

  4. Eeyore says:

    Wouldn’t the reaction of self-funded retirees will be simply to move their investments into areas not subject to tax imputation?

    There are many companies who pay dividends without tax-imputation credits, meaning that the whole dividend is paid directly to the shareholder.

    Is the ALP so stupid as to imagine that banks and other who pay franked dividends, will note the needs of their shareholders and will start paying without franking credits?

    Has Shorten and co forgotten that the earnings of super funds, in retirement phase, are tax-free? Or does he plan to change that, too?

  5. Eeyore says:

    “Is the ALP so stupid as to imagine that banks and other who pay franked dividends, will note the needs of their shareholders and will start paying without franking credits?”

    Should read

    Is the ALP so stupid as to imagine that banks and other who pay franked dividends, will fail to note the needs of their shareholders and start paying without franking credits?

  6. Tezza says:

    The comments by Zedaus are necessary to round out Peter’s excellent article. Retirement super products (such as allocated pensions) that qualify for zero tax both in the fund and in the hand of the over-60 retiree have to draw down their capital at increasing rates as the recipient ages, which approaches as closely as is prudent the exhaustion of Jill’s capital at full life expectancy.

    But that doesn’t detract from Peter’s basic point, because as Jill’s capital declines, she becomes eligible for an age pension, initially a part pension, then ultimately a full pension if she lives long enough. The effect of Shorten’s genius is to cut Jill’s initial annual income by $9,500 (accepting Peter’s numbers), forcing her to deplete her capital by an extra $9,500 a year (initially) to sustain her pre-Shorten standard of living, leading to her accessing the age pension earlier and in larger amounts. (All this ignores inflation and any real growth in returns on Jill’s capital; incorporating those facts in the analysis adds assumptions and complexity, but doesn’t change the result over any plausible range of assumptions.)

    So Jill’s self reliance in retirement is truncated and her dependence on higher future taxes on the young to pay her an age pension rises.

    Of course Rob Brighton’s alternative course for Jill has merit: she could make a Trump play, sell her Australian shares and buy US shares, say though a low cost index fund or ETF. There seems little doubt that US equities will continue to outperform Australian equities for all the usual reasons: Australia’s idiotic energy policies, hostility to foreign investment in coal, arbitrary taxes on banks, degenerate education system, hyper-regulatoin, productivity-destroying waste in public projects and so on.

    But the more Jill takes Rob’s advice, the less of the magical $59Bn over 10 years Shorten actually receives. In any event, trust in superannuation and the aspiration to self-provide for retirement is destroyed and the growth in the age pension bill increases.

    The same tendencies were already apparent from the interaction of the Abbott/Hockey reversal of the Howard/Costello reduction in the age pension taper with the Turnbull/Morrison tax increases and regulatory restrictions on super. See Save our Super and SuperGuide websites for an explanation and numerical working through of these issues.

    The whole catastrophic degeneracy of policy making since the high-water mark of 2006-07 is apparent in this area of policy. The Treasury in the Howard/Costello era did long term modelling of retirement income and demography to prevent idiotic short-termism in this most complex area of policy. Today, both Government and opposition are flying blind, so the resultant crashes should surprise no one.