Labor’s Frank and Forthright Gougers

pickpocketsI saw some talking empty heads on the Sky business channel suggest that Bill Shorten’s selective confiscation of franking credits might be a good thing if it steered retirees away from investing too much in bank shares. I have read other idiotic paternalistic stuff of this variety in my usual newspaper The Australian. People earning inflated salaries with no idea how most self-funded retirees manage to live.

Amidst the dross, it is worth mentioning that Judith Sloan and Henry Ergas stand out as marvels of economic clarity and sanity on this issue. It might pay the newsaper’s economics correspondent, Adam Creighton, to learn from his colleagues’ good sense.

Why am I writing about this again, having done so quite recently (“Thieves at the Door, Dolts in Residence”)? True, I have a vested interest. But my real motivation is to give as much transparency as possible to the sheer unprincipled nature of the threatened regime.

Franking credits are returned to dividend recipients because the tax, at the company tax rate of 30%, has already been paid by the company concerned. There is a strong logic to it. Nevertheless, numbers of countries do not have it. That’s fine, taxation across all jurisdictions is a dog’s breakfast. You either have this provision or you don’t.

What I suggest is unique and untoward about Labor’s policy is that it inverts the usual order of confiscation. It keeps franking-credit rebates for those who are well off while denying them to those who aren’t. Consider what is intended by Shorten and his enforcer, Chris Bowen.

Take someone who earns a lot. If he (or she) has available franking credits of, say, $10,000, he will still be able to claim those credits to reduce his tax bill, dollar for dollar. Thus, the well off, of whom I guess Shorten and Bowen are numbered, are fine and dandy. By contrast, those struggling on a full pension with, say, a few Telstra and bank shares will be barred from claiming their franking credits. As, similarly, will be self-funded retirees with modest investment incomes. Those supporting a family on a basic income and who hold a few shares as a backstop will not be able to claim their franking credits. In sum, for those on Struggle Street, franking-credit rebates will be verboten!

Ask Shorten why the well-off person is to continue to get back franking credits. Let me answer for him. Each person pays income taxes on their total income (including dividends plus franking credits) in accordance with the taxation scales.  Franking credits are returned (rebated) because they correspond with the amount of tax already paid by the company distributing the dividends. Sans rebate, the taxpayer would be paying more than set by the tax scales.

Now take someone, let’s call him Mr Struggle-Street, whose income is $25,000 plus $2000 fully franked credits. Under the regime applying to Mr Well-Off above, Mr Struggle-Street (on 2017/18 tax scales) would pay tax of $1,670 on $27,000 less $2000, giving him a cash rebate of $330. Sorry, the computer says no. No cash rebate for you!

A retiree having any amount up to $1.6 million (most have a lot, lot less) in a self-managed superannuation fund, for which the taxation scale is set at zero, loses all franking credits. Again, very rich retirees, with millions to play with, have scope to grab franking credits. Who says that Labor don’t like rich folk?

Apparently, the self-same money on which tax has been paid by the company belongs to Mr Well-Off but not to Mr Struggle-Street. Shorten is giving the tax office license to steal from vulnerable people. Why do thieves so often get away with it? The victims are too weak to resist. They are old. They are too slow to run away. They are out of options. They are easy targets. How can the Labor Party live with itself?

Shorten deflects. He is quoted as querying why “seven million Australians on less than $87,000 a year have to pay income tax on the money they pay, but don’t get a refund when they pay no income tax.” Mangled syntax aside, you get the drift. And it is pure sophistry.

People, whatever their income and wealth, don’t get franking credits back if they don’t own the shares on which companies have already paid tax. This has nothing to do with equity across taxpayers. If the Labor party wants to extract more revenue from the well-off then so be it.  That would be business as usual. But on what twisted basis would Labor allow rebating of franking credits for the well-off and disallow them for the not so well-off?

I doubt Shorten would get away with his Sheriff of Nottingham impression at a time when most commentators still had their wits about them and a smidgen of balance. Now, for the most part, we have mostly dimwits and left-wing hacks holding politicians to account.

We live in inauspicious political times. Hide your money under the bed — or else invest more in overseas shares and hope for better capital gains. Or how about a more luxurious pad and a government pension? Result: less domestic capital for Australian companies and not nearly as much revenue as Bill expects.

37 thoughts on “Labor’s Frank and Forthright Gougers

  • Jody says:

    Creighton is young; he hasn’t been around long enough to understand the nuances and depredations of life. So he is forgiven. Meanwhile, nothing is every said about Defined Benefits pensions (public servants and politicians, like Shorten) where these pensions are linked to CPI and last wage before retirement, paid until death and a part of it reverting to the spouse – even if he/she has her own!! It’s perverse.

    Time to start talking about “deeming” and the amount of capital you’d need to draw even an Aged Pension; this would be circa 1 Million dollars today. The ‘deeming’ for Defined Benefits would be in the many MILLIONS. Yet not a single mention is ever made of these perverse annuities. The fact that SRF’s have their own ‘cash’ is the problem and the realization that ‘the rich’ are so thin on the ground that government HAS to milk the middle class IS NEVER DISCUSSED. I have relatives living extremely comfortable on Defined Benefits and because they’re so generous they’ve been able to save a great deal of cash from these (if they didn’t have it already, which I doubt).

    The fact that Turnbull is not doing the rounds of all media selling this perverse tax grab from Labor means the argument will be lost. Morrison is trying but he cannot do it alone. I spoke to him at a private function a little over a week ago about this and expressed my concern, as did a couple of my relatives. He’s the hope of the side at the moment, as is Matthias Cormann. Forget Turnbull; he’s a CEO and has no interest in doing anything but clothe himself in pomp and glory. His gig is largely a ‘ceremonial’ role these days.

    • Tezza says:

      Jody, I think you have missed developments during the 2016 Turnbull super measures that took effect in July 2017, and which certainly increased tax on the old defined benefit public service scheme. (Incidentally, this scheme was closed to new entrants over a quarter of a century ago, so it is a legacy issue, unless you propose going back to rip up contractural super arrangements that people paid in to over a working life time, in order to reduce the benefits they contributed to after they retired.)

      The public service defined benefit scheme always attracted income tax in retirement. Costello retained that tax on public service defined benefit pensions in the 2007 changes that removed tax on qualifying allocated pensions paid to those over 60. But he legislated a 10% rebate on income tax paid on defined benefit pensions. In 2017, that rebate was capped, increasing the income tax on higher defined benefit pensions. Moreover a deemed capital value was placed on defined benefit pensions which (since over the $1.6 million cap for higher pensions) prevented affected recipients from having any other super savings in a tax-free retirement phase account. Any other super savings had to be transferred to an accumulation phase account whose income was taxed at 15%.

      So what you term ‘perverse annuities’ – old defined benefit pension arrangements entered into decades ago – were certainly not ignored in Turnbull’s 2017 increase of taxes on superannuation.

      The problem we now grapple with is that since Turnbull, Morrison and O’Dwyer legitimised in 2017 effectively retrospective increases in tax during retirement on funds contributed under earlier incentives, it’s open slather for half-baked schemes like Shorten’s, which selectively and arbitrarily changes the definition of taxable income and (as Peter argues) selectively and arbitrarily increases the tax rate on some income to some people.

      As usual, Abbott has a sensible framework for thinking about these issues: the tax rules that drew savings into super should be the rules under which the attracted benefits should be taxed on the way out. Politicians can argue for whatever tax increases they like on superannuation, but any changes should be grandfathered for those who have already committed their life savings. Otherwise, we will submerge in the current morass: no one has any trust in super anymore, and building a retirement strategy around a part age pension becomes the better strategy.

      • bts@swiftdsl.com.au says:

        May I thank you for this admirably clear and succinct exposition?

        I am an 82 year old retiree receiving a defined benefit pension. It is not a conventional public service pension. It is emphatically not a political pension. The recent changes have meant that a sum in the order of $16,000 per year has been expropriated by, not just any Government, but a supposed Liberal Government. What sort of appalling prospect does that offer retirees such as me when, as seems to be inevitable, a Labour/Greens alliance comes to control both Houses of Parliament, following the next Federal Election?

        Time and time again this sorry Government has set precedents which contradict the supposed basic tenets of the Liberal Party. Upon what basis that is even faintly credible will they be able to oppose the certain adoption by the Labour/Greens alliance of those very precedents, the better to inflame the class war that people of my age thought we Australians had grown out of a long time ago?

      • Jody says:

        I am well aware that generous government-funded pensions were phased out. I was a highschool teacher and paid everything into super on top of my employer’s compulsory 9%. It’s the INCREASES in the DB pensions and the fact that these pass on to surviving spouse irrespective of whether or not they also have their own annuity which is appalling. If you pay tax under that DB system you can easily look forward to another pay rise connected with your last job. My family are all retired school deputies and principals who are saving a lot of money because their DB pensions are so generous. The little tax they pay is of no consequence since the pay is so high to start with.

        The deeming rate for them would be 4 times higher than anything I have put aside in my own super fund or outside of it – yet I am to be targeted. Yes, Morrison et al started the rot with the things you mention – but don’t you think 1.6million in super is adequate to be getting out of paying any tax? Clearly there are have rorts in the system with the sheer amount you can have without paying tax. That was always unsustainable. Trouble is the opposition and government have long ago realized that the top end is so thin on the ground that they must lower the bar on ‘rich’ because the middle is where the real gold resides.

        The Coalition will fight tooth and nail for this because, for the first time arguably, it represents BRAND DIFFERENTIATION. A 30% tax with no thresh-hold is certainly a vicious, new tax.

        • ianl says:

          > “A 30% tax with no thresh-hold is certainly a vicious, new tax”


          You are correct on the comment about the ALP bashing the elderly middle-class. The word “retiree” has become a dirty word, stupidly synonomous with enormous amounts of $$$ and no tax payable. No lump sum for the envious … and so on and on.

          Over a decade ago, I came to the realisation that superannuation was truly dangerous for the ageing. It was obvious that a super account at, say, 65 could contain a million $$ with those FORCED working lifetime deposits and reasonable investment by the super managers (or even by the SMSF owner). Why is that dangerous ? Because envy is Aus’ dirty little secret, that’s why. A forced savings scheme that is an irresistible target for both the envious and the politically greedy. It cannot be tampered with by the so-called rightful owner for decades so it remains a target. And so it has come to pass – “retiree with superannuation” is a dirty phrase now, and a favoured target for the envious. So Shorten feels quite safe in bashing old people as it appeals to the envy of the younger and provides him with oodles of spending money. And costs very few votes since older people already know what the ALP is – thugs, bashing old ladies for their purses. The oldies may have some money and the ALP thuggees want it.

          BTW, Creighton is most decidedly NOT forgiven. He’s a whingy little millenial who’s been whining out his envy of the demon oldies for over 12 months now.

          • Jody says:

            I agree with what you’ve said except for Creighton who has written some very very intelligent things in “The Australian” and contributed equally well on Sky News. He’s misguided about certain things to do with superannuation and that will come back to haunt him, but he does have a grasp on our economic system as a whole.

        • lloveday says:

          Quote: “these pass on to surviving spouse irrespective of whether or not they also have their own annuity”.
          Also regardless of the spouse’s age, length of marriage, and status as “spouse”, at least in some schemes.
          Thus Don Dunstan’s boy friend was, as I remember, but can’t find a reference, granted DD’s super, and I heard of an elderly widower who “on his death bed”, married a young niece, thus bequeathing 66% of his pension to her, indexed for her expected 60 years of life to come.

        • Tezza says:

          I still have a problem with your world view, Jody. We are dealing with the legacy of a very old public service scheme, created well before Clyde Cameron had the brilliant idea under Saint Gough around 1973 of making the public sector the pace setter in wage increases that it remains today. All your retired friends entered the old defined benefit system which was a very generous part of a then-modest salary package. That a reduced super benefit continued to be paid to a surviving spouse (you know, the old type of the opposite sex, actually married) was part of the original deal. So what are you proposing to do now? Rip up a savings scheme that your friends contributed to for 40 years, in order to reduce their living standards in retirement? What are your views in general about ripping up contracts? The cavalier attitude to changing super rules in mid stream of a lifetime savings and retirement is exactly what led us to this mess. All that is necessary to make any changes necessitated by slow demographic pressures is to model them carefully to ensure they will work, and grandfather the existing schemes just as was done for the last 40 years.

          As for $1.6m, the point is that it is an effectively retrospective tax increase in a system introduced in 2007 with sound long-term modelling as to its effects in encouraging declining reliance on the full age pension, transitory reliance for a few decades on a part age pension, en route to fuller reliance the longer term on wholly self funded retirement. To introduce a 15% tax on the earnings over $1.6m is a significant effectively retrospective tax increase on the 2007 law which encouraged savings into super, and formed the retirement income expectations of those currently retired.

          The sad arithmetic is that you have to be pretty rich to beat the age pension, which has an actuarial value to a retired couple of at least $1.2 million. Unlike any annuity you could buy for $1.2 million, the age pension has no longevity risk, no market risk, no inflation risk, little political risk (compared to super) and is indexed to wages growth (ie, more than inflation). The $1.6m cap, rather than being generous, is pretty much saying “don’t bother, just go for the age pension”.

    • lloveday says:

      Quote: “Defined Benefits pensions (public servants and politicians, like Shorten)”
      Did Howard not close the DB pension scheme for politicians to newcomers in 2004?
      Was Shorten not first elected in 2010?

      • Jody says:

        I don’t give a damn who started them; there are people still on these profligate scheme and the rest of us are facing claw-back and gouge who have our own money to support ourselves. Rest assured the Defined Benefits superannuation beneficiaries will still get theirs (including politicians today) no matter how feral the market goes and whether or not everybody else loses every cent they own. The fact that this is NEVER discussed and all the while self-funded retirees are in the gun is completely immoral and outrageous. We stand to lose a lot and DB recipients NOT A SINGLE CENT.

  • jabdata@bigpond.com says:

    In these straitened times the usual commentary gives us plebs an address to the nation.
    “Men and women of Australia it is my melancholy duty to advise that we are broke and I would like you all to tighten your belts. All valid pensioners will receive their normal payments in the foresee-able future. To aid our recovery al public servants and mp’s salaries will be frozen until the debt is paid. We know how financiers like to keep you in debt personally. You might have read that Financial Storm executives have been charged.
    So people, please help Australia recover. Our members in the parliament are jointly with me in this action.
    God Bless you all and I will be in touch.”
    I guess the pigs are flying! AlanIO

  • Tony Tea says:

    Shorten went to Xavier. Xavier is “a Catholic college in the Jesuit tradition”. Jesuit lies became so notorious that even other Catholic authors criticised Jesuit sophistry. Shorten is a massive sophist and liar.

    But you only need to listen to him for five minutes to know that.

    • Jody says:

      They never ironed out his speech no matter how well he was educated. He left ‘wiv’ a sense of entitlement but sadly he doesn’t have a scintilla of class. Or ethics. Or morality. You flatter him calling him a ‘sophist’ since I doubt he knows the meaning of the word.

  • prsmith14@gmail.com says:

    I see that Labor has backtracked a tiny step and exempted from franking-credit confiscation those receiving the full pension or receiving allowances such as carer payments and disability support. Apparently too, those now receiving a part pension will be exempted but not future recipients. ‘Lipstick on a pig’ and ‘a dog’s breakfast’ are equally applicable epithets.

    Take a single home-owning person (A) on a base pension of $21,500 who holds superannuation assets of $250,000. Assume (1/5th) $50,000 earns 2% and $200,000 earns 5% fully franked. This will produce total earnings of $36,800.
    Take the same kind of person (B) who holds $600,000 in superannuation assets. Assume 1/5th earns 2% and 4/5ths earns 5% fully franked. This person is not eligible for any pension nor for franking credit rebates. This will produce a total income of $26,400.

    You will note that person B was previously seriously disadvantaged by Scott Morrison in being stripped of a part pension as a result of him doubling taper the rate at which the pension is reduced for each $1000 dollars of assets held over a prescribed threshold. Great socialist job Scott! Now he or she is to be completely diddled and done by Shorten.
    Does nobody find it screwy beyond belief that someone who has saved $600,000 and therefore done themselves out of pension because of being screwed by Morrison is now to be doubly screwed by Shorten. The world has gone completely mad.

    • Lewis P Buckingham says:

      ‘Take the same kind of person (B) who holds $600,000 in superannuation assets. Assume 1/5th earns 2% and 4/5ths earns 5% fully franked. This person is not eligible for any pension nor for franking credit rebates. This will produce a total income of $26,400.’

      Were this $600000 held in an industry or bank run super fund, would not all the franking credits be allowed for?
      As I understand the intention of the opposition, self funded super funds which make less than the taxable threshold do not have their franking credits credited to them, but are confiscated.
      If the same money were pooled in a super fund, say HESTA, then since the super fund makes more than the minimum taxable amount[and some], it avoids confiscation of franking credits, which are distributed to the super fund members.
      Before the Liberals justly allowed refunds of franking credits I considered setting up a disability fund for one of my children, catastrophically injured at birth.
      I thought a good idea was to invest in say CBA shares and let them grow with franking credits.
      Ringing the ATO I was disabused of this, they would not allow credits, my comment’ thats red hot’.
      She was to be taxed as a punishment for investing in Aussi shares.
      The most vulnerable.
      Shorten has just worked this out.He is exempting disability trusts.
      But for the wrong reasons, because of backlash, not principle.

      • Jody says:

        There are many pundits who think this is a deliberate ploy by Labor to get SRFs into union-associated superannuation funds. That seems highly likely.

        I always think of the law of unintended consequences; I’ll be heading into property and folding our SMSF as I don’t want expensive auditing costs and taxation at 30% without a tax-free thresh-hold. It isn’t worth the loss of income, so we’ll pull out and get into real estate. So what if that makes it harder for the younger generation to buy into; governments must understand the law of ‘unintended consequences’. And to think Morrison offered retirees a one-time $300,000 each into super (over 65) if they downsized. That is now not only unlikely but absolutely impossible to contemplate. So, I’m afraid retirees are going to continue to own all the real estate assets. Thanks Coalition and Labor – from the millenials of Australia.

        • Lewis P Buckingham says:

          When the debate on this opened I received the following.

          The Ned Kelly gang versus the Ben Hall gang

          ‘We note that Labor’s information on superannuation funds was based on financial year 2015/2016 since not all returns are completed for financial year 2017. This means that not only was its information dated but it did not take account of the changes made by the government which became effective from 1 July 2017. Those relatively few huge self managed superannuation funds which had assets up to $100 million referred to by Mr Shorten were dealt with by the government because as a result of the changes arising from 1 July the vast majority of those assets reverted to accumulation phase from that date. Their accumulation accounts are taxed at 15%. Their overall fund’s tax rate is determined on the weighted average of pension accounts with zero tax and accumulation accounts taxed at 15%. Hence those with proportionately huge accumulation accounts will be able to utilise significant imputation credits and will adjust holdings of any surplus franked dividend paying shares to bring the forfeiture of imputation credits to a zero balance. While Mr Bowen, the shadow treasurer has indicated that 50% of the revenue Labor expects to collect will come from the largest 10% of self managed superannuation funds, this particular segment of funds will in actual fact return near zero dollars because of the combination of the impact of the changes enacted by the government from 1 July 2017 and their inevitable restructuring of investments.’

          If this be the case we must look foreward to TAX 102 ‘A Bill to confiscate more from those unable to restructure their finances’.

  • brian.doak@bigpond.com says:

    In Parliament today Turnbull disclosed that his researchers had found that in the 1990s Labor advocated that pensioners be allowed to use the franking credits. He read at length from their advocacy statement, it says quite the opposite to their present stance.

    • Jody says:

      You’re putting us on; politicians aren’t inconsistent!!!

      • Len says:

        Peter refers to the latest iteration of Labor’s proposal for the treatment of franking credits as a dog’s breakfast. He is correct but then superannuation overall has increasingly been a dog’s breakfast since at least the Keating tax reforms at the beginning of the 1990s. Those reforms involved the taxation of employee contributions – these were made from after tax income – and the taxation of (funded) employer contributions and investment earnings in the hands of the fund managers, albeit at a “concessional” rate. The tax already paid on these components was then offset in the benefit stage by reducing total income from the benefit to taxable income.

        A rational approach would have been to allow all superannuation contributions and fund earnings to be tax free until the benefits were received as income. The income could then have been subject to normal income tax rates. In those days superannuation “reasonable benefit limits” applied which controlled the maximum amounts that could be accrued as superannuation. Changes have been made to superannuation rules over time which have been required in part by that original superannuation tax treatment and the necessity to “grandfather” to some extent each succeeding set of rules.

        One of the disadvantages of the taxation of contributions and fund earnings is that the tax has already been progressively collected and spent by successive governments. As superannuation savings have increased over time the amount of tax received annually has also grown. That tax is not now available to governments in the retirement phase thus reducing current revenues unless double taxation is to be imposed.

        Another disadvantage is that commentators tend to see the resulting low taxable incomes in the benefit stage (compared to the amount of income actually received) as being somehow unfair. This impression has been supported by the formal removal of tax on the benefit stage – many commentators seem not to understand that the low taxable incomes have two causes. The Grattan Institute’s highlighting of the difference seems at least in part a result of this misunderstanding. I don’t know why that most recent removal of tax in the final benefit stage was adopted, I can only surmise that the increasing number of low taxable incomes (resulting from offsetting the tax already paid), in the context of the tax free area was an administrative burden that is not worth the cost. But the misunderstanding of the two causes of the low taxable incomes that has resulted is unfortunate.

        There also seems to be a misunderstanding by some commentators about the taxation of dividends in the hands of companies and the availability of imputation credits. That the imputation credits reduce the taxable income of shareholders (in some cases to nil) seems to lead to a belief that because shareholders are not themselves directly paying the tax they are getting a free ride. Again, this seems to be the cause of the Grattan Institute’s apparent delight at discovering the difference between income and taxable income. Of course if you start with a socialist mindset of “all your money belong us” it is not surprising that you will see any such effect as under-taxing and not the converse as being the double taxation.

        • Len says:

          Some brief comments on defined benefits:

          To be clear, superannuation benefits (whether taken as lump sums or pensions) are employment based while age pensions and the like are social welfare based. Superannuation is part of a remuneration package and in the normal course there is an obligation (required by government and/or contractual) for the employer to fund it either directly or via contributions to a superannuation fund.

          As part of the remuneration package there is an implication (originally quite explicit) that the salary component would be correspondingly lower. Moreover, most superannuation schemes are contributory with the employee being required to contribute a percentage of his/her after tax earnings to the fund. While this usually continues for as long as the employee is employed, the impact falls more heavily on the earlier years of the employee’s working life. At a time when most people are trying to pay off a mortgage, start a family, educate their children and pay income taxes (including for the provision of social welfare benefits to others), they have salary lower than it might otherwise be and then also have their useable income further reduced by the requirement to make employee superannuation contributions.

          It therefore escapes me why an age pension or the like might be considered to be a “valid pension” but a superannuation pension might not.

          As an employment related benefit, it is “owned” by each individual employee. So it can be expected that if each member of a couple is employed, each is entitled to a superannuation benefit. Most defined benefit superannuation schemes have historically implicitly recognised that employees are likely to have a spouse and part of the terms is the provision of a reversionary benefit of a proportion of the pension to the surviving spouse on death.

          The entitlements in most defined benefit schemes are based on years of employment, rate of contributions and final salary or final average salary. The shorter the period of employment, the lower the accrued benefit. Most schemes index pensions to the Consumer Price Index to take account of inflation and maintain the value of the pension. In periods of high inflation pensions can lose value rapidly if they are not indexed – more recipients would then progressively qualify for an age pension or part pension and the associated health and other benefits. Note that age pensions were also indexed to the CPI but are now indexed to the higher of CPI or Average Weekly Earnings.

          So as to reduce costs earlier superannuation schemes have been closed and have been replaced by less costly schemes. This has also happened with the many schemes that have been operated by the States and State Authorities. In some cases those replacement schemes have placed more emphasis on the provision of lump sum benefits because they are lower cost to the employer. Lump sums are attractive to many employees who have not previously had access to such large amounts. However, they generate uncertain or irregular income over time. The recipients then qualify for an age pension or part pension and the associated welfare benefits. Those increasing social welfare costs for these people are then met by the Commonwealth Government, that is, the taxpayer.

          • Jody says:

            This is all general knowledge to the retiree community. The guarantee of Defined Benefits also afford protection from the instability and general volatility of the share-market. A millionaire one day/a gamin the next!! This is how it works and for the retiree’s ‘trouble’ he/she gets to spend hours in paperwork, market-watching, seminars, reading, consulting experts and chewing fingernails. I wish I’d known about Defined Benefits and the residuals to surviving spouses, especially when these forms of pension have been conveniently airbrushed out as a burden to taxpayer and those with a ‘head of water’ (capital) on which to draw income are in the firing line. How dare they accumulate wealth!! It’s outrageous.

        • Jody says:

          I watched Lord Waffle squirm in parliament yesterday when Dan Tehan got stuck into the miserable Grattan Institute and the execrable John Daly. Lucy is on the board!! So completely out of touch. Daly suggested a couple of years ago that $300,000 was ‘adequate’ for a ‘comfortable retirement’. Gawd, I only recently paid $120,00 for a new car!! And the economy got a boost and the government got my $20,000 luxury car tax. A win/win all round. When I fold my super fund and head into Centrelink there will be no winners. Especially taxpayers. We do have money outside super (legislative risk, and damn right it was to do that!!) and will organize our affairs quite differently when Shorten (Dr. Franking Stein) takes his theft to a new level with a monstrous tax grab. I won’t be supporting the economy again, that’s for sure.

          Nothing less than comprehensive taxation reform from our government will suffice, I’m afraid.

          • padraic says:

            It’s incongruous, isn’t it? There’s Shorten thinking he is going to rob the rich to give to the poor peasants and be Robin Hood when instead he suddenly finds himself the Sheriff of Nottingham. Quel horreur! The worst thing about it is that he so patronizing when he thinks retirees are a mob of dummies and clodhoppers who can’t understand their retirement arrangements. They sure do, and don’t appreciate his changing the goalposts. Even if we accepted the dummies and clodhoppers tag we still get our minds focused when it comes to how we will fund our retirement.

  • Jody says:

    As Talkbull said today in the parliament, “if a retiree earns income from rent, no problem, but if it’s shares there will be a huge tax”.

    Labor is DEAD IN THE WATER over this. Bets

  • Geoffrey Luck says:

    This article with its mish-mash of irrelevant facts larded with emotional claptrap brought out the anticipated illogical responses from those whose mental facultis are connect to their hip-pocket nerve.
    It is instructive that Peter and his commentators praise Ergas and Sloan on this issue – the one time they have been wrong – and lambast Creighton, the only person who has spoken the disinterested truth.
    Although it may hurt me personally. the logic of Shorten’s policy is unassailable. Dragging in defined benefit schemes shows the poverty of thinking. The basis of dividend imputation is that tax should not be paid twice – first by the company, and then by the shareholder on dividends paid from those distributed after-tax profits. Nobody seems to have difficulty understanding that, but they cannot follow the logic that if the taxpayer does not have income against which to set the franking credit, they should NOT be paid the credit in cash from the ATO. Because that would mean the company pays no tax at all.
    One has only to look at how dividends are defined in every prospectus. Here’s a recent one: Distribution Rate = (BBSW Rate + Margin) x (1-tax rate) – this for a bank’s interest-bearing security. So when that entity pays its quarterly distrubtion, this is what the statement shows: Bank Bill rate 1.7950%. Margin 5.1.000%. Total 6.8950%. FRANKING ADJUSTMENT 0.721649%. Distribution rate 4.9758%. Franking rate 30%. Franked amount A$331.26 Unfranked amount (10%) A$36.81. Franking credit A$141.97.
    It is immediately obvious that although the coupon promises 6.8950% the distribution rate is only 4.9758% UNLESS the investor is able to claim the franking credit.
    The one thing that Peter did say that is correct was: “People, whatever their income and wealth, don’t get franking credits back if they don’t own the shares on which companies have already paid tax”
    Arguments about pensioners v the wealthy are emotional distractions.

    The one observation above that is appropriate is that tha tax system is a mess, and the superannuation system (a bigger mess) has compounded it. When I retired, I opted to cash out my superannuation benefits because I foresaw so many changes that would decimate my savings. As it was I paid tax at three different rates (exemplifying the changes in superannuation that had already taken place and therefore my fears for the future) including a massive health fund levy on the capital sum! Since then I have managed my own portfolio, paid no advisers or fund managers, received no pension and taken investment risks on my own shoulders. I pay tax on investment income and benefit from franking credits, but our finances are still so modest that I qualify for the Commonwealth Health Card. I am the original self-funded retiree. The tax concessions on superannuation are unjust and distorting. They are more worthy of attention than the franking credits. Until recently this tax-free income from large superannuation balances did not count at income for the Health Card, but my and other submissions had that rort stopped.

    • prsmith14@gmail.com says:

      Don’t think you have quite got your argument right Geoffrey.

      This is the core of your argument: “Nobody seems to have difficulty understanding that, but they cannot follow the logic that if the taxpayer does not have income against which to set the franking credit, they should NOT be paid the credit in cash from the ATO. Because that would mean the company pays no tax at all.”

      Companies are artefacts and do not pay profits tax. Shareholders pay tax. Dividend imputation effectively makes this explicit by shifting the tax obligation (on that part of profit distributed) to shareholders and, moreover, at their applicable personal rate (which is often higher than the company rate). Companies pay no tax on this profit whatever the taxable position of individual shareholders. To wit, someone who offsets franking credits against a taxation obligation means that the company is paying no tax. There is no difference in that respect between someone who is able to offset franking credits and someone who isn’t. Your argument fails at the first hurdle.

      As for what you call “emotional claptrap”, I do not think it misplaced to draw attention to the fact that many elderly people on very modest incomes, who have made their plans on the existing rules, will be severely disadvantaged by Shorten’s policy.

      • Geoffrey Luck says:

        Peter: Befoe dividend imputation, a company – your artefact – paid company tax and the shareholder paid his appropriate personal marginal tax rate on the dividend received. There was always a liability for the company to pay tax. All that has happened is that with franking credits, the shareholder is alble to set them against his income. Those on the higher incomes will get the same benefit as those on lower incomes – the rate of tax the company would pay. That’s why brokers always quote the dividend as 30% less than that declared. To satisfy your objection that a compay is an artefact I will re-phrase my statement to say that if the shareholder gets a cash payment for his franking credit, nobody pays tax on the profit the company declared.

        • prsmith14@gmail.com says:

          Geoffrey, Dividends plus franking credits accrue tax according to the tax scales applicable to the dividend recipient. To say that in some circumstances no tax is paid is absolutely right because the dividend recipient does not always end up with a tax obligation. If that is found to be anomalous then change the personal taxation scales. To say that nobody pays tax in some circumstances as you do is trivial. Lots of people who earn income pay no tax. The fact is that you are wrong in your original argument and you should concede the point and retract your objection to my argument. In every case where franking credits correspondingly lower the personal tax paid or, alternatively,result in a rebate, the tax paid by the company is exactly offset by a tax gain by the dividend recipient. There is no difference between the two cases. Surely you can see that.

    • Tezza says:

      Bad news, Geoffrey: companies don’t pay tax. That’s the case in economic reality under any tax system, as the economic incidence of the tax can’t be on the company as a legal shell. The economic incidence is on the company’s owners, workers or managers (in lower returns or remuneration) or customers (in higher prices for the company’s output.) In Australia’s system, the company tax is effectively a prepayment of the shareholders’ income tax, and if the shareholders’ income tax base (as defined in law) means their income tax rate (as defined in law) is zero or lower than the company tax rate, they get (in effect) a refund of the overpayment of their tax. The company doesn’t throw a party or pay the management a bonus because of the shareholders’ refund.

      If all this is acknowledged, why not abolish the company tax collection point? That’s a reasonable question and the only answer I got from the old guard in Treasury was that it was dangerous to build a tax system on just one collection point, and it was allegedly better to lower the risk of evasion by using several collection points and having a cross-check on income flows. That’s essentially also the argument for having a consumption tax and an income tax, instead of just one or the other.

      Incidentally, Labor’s running revision to its proposal makes the original inequity worse and the original perverse incentives more damaging. Originally, if as a holder of Australian equities you were paying tax on other income or a superannuatant in a commercial or industry fund you were OK, but if you got untaxed income from a SMSF, an age pension or merely had an income below the tax free threshold, you faced a 30% tax rate. That was a disincentive to owning Australian shares if you were low income, an age pensioner or a self-funded retiree who got income from an SMSF. Under the revised approach, the age pensioners get off the hook, so the encouragement to arrange one’s affairs to get an age pension and the discouragement to self-funding retirement become even more pointed.

      As to practical impact, timing is everything. The revised scheme would take effect over two years in the future (assuming as I do that Turnbull will be walloped). However Labor now says “pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019. Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.”

      So there’s plenty of time for SMSF’s owning shares in companies that pay franked dividends to be traded to those who can fully use the franking credits, ensuring zero extra revenue to Shorten, but a likely loss of income to SMSF members (assuming they can not find assets of comparable risk and return to invest in).

      There’s also plenty of time for those SMSF members earning not much more than the age pension to rearrange their assets so as to get a part age pension and keep their franking credit refunds.

      Labor will end up with no extra revenue. But it will have more expenditure on the age pension, plus the new expenditure it will promise from its imaginary franking policy revenue to win office. SMSF members who don’t get an age part pension will lose income. And everyone who hadn’t already lost trust in superannuation would join the disillusioned majority.  

      It takes real policy genius to achieve this mixture of outcomes.

      • Geoffrey Luck says:

        A company is an abstract? A company is a shell? In fact a company is a person in contract law. Here is the legal definition:

        Abstract. The incorporation of a company is an artificial entity recognized by the law as a legal person that exists independently with rights and liability. This means that a company is treated as a separate person from its participants. It is owned by at least one shareholder and managed by at least one director.
        A company is an artificial person created by law – Law Teacher

        It is for this reason that a company has a tax liability, independent of its shareholders. You have only to consider the companies that offer 50% franking on their dividends, or no franking at all to realise this.

  • Jody says:

    This is completely wrong. And out of order!

    Firstly, 11 years ago we were advised to set up a one-time tax free superannuation fund by Costello. We all did this instead of spending our money.
    Secondly, we were told we would pay no tax in that fund once over 60. But we still pay indirect taxes like everybody else.
    Thirdly, not receiving a refund on imputation credits means that we are effectively paying a tax rate higher than 15% in our super fund WITHOUT a tax-free threshold; probably of the order of 30%. By all means if outside super funds change this system – but not insider superannuation!!
    Fourthly, the Labor government has already signalled tax on super funds where people earn $75,000 pa and the Coalition will tax all funds over $M1.6. So there is another hammer to be dropped on these retirees apart from the latest Labor tax grab.

    We either have tax free or we do not. Companies pay tax but, we, as owners are the ones actually paying it. That means we do not have a tax free superannuation scheme if we hold shares in companies (under Labor) who distribute fully franked dividends. And for the pleasure of that we pay a fortune in auditing and run the gauntlet of the volatile share market. All the while Defined Benefits have regular increases and no matter what the stock market does they still get the same amount each week. The taxpayer picks up the tab. They will not feel, in any way, the reversal of imputation credits. And there are people in multi-million dollar homes in Sydney picking up the Aged Pension.

    Lastly, the government put a ‘levy’ on the four big banks and I just got my dividend from CBA overnight and it is hugely smaller that before; that means I’ve also paid the ‘levy’. So, taxed at all stages of the process – as opposed to defined benefits who pay tax ONCE.

    There’s a clawback underway of the cash of self-funded retirees while people look the other way over extortionate wages in the public sector and perversely generous superannuation schemes for many on the public purse. It’s easy to go after self-funded retirees and label them rich – but what happens is that the bar is effectively lowered on ‘rich’ because governments know what I do; that those in the really high brackets have mobile funds and are very thin on the ground proportionally. I don’t want the pension or part-pension but if my income drops from this I will definitely head off to Centrelink. And my husband didn’t work 7 days a week for 24 years – with 2 weeks’ holiday – in our own business only to be told now that we’re ‘rich’ and need to support the deep state and a shrinking taxpayer base because of welfare.

    This will not stand.

    • pgang says:

      It will stand, because governments and bureaucrats have long since passed the critical mass of control of everything. If you park your car in the wrong spot – $400. $1,000 a year just to get permission to put a car on the road. And the regulation of industry, dear God, don’t get me started. Real taxes for a working person must be pushing the 60% mark when you add in all the post-income hits on expenditure and savings.

      Who is going to stand against it, now that we’ve given away the protection that was provided by Christianity? It’s not possible to change direction anymore and things will only get worse from now on, as freedom becomes a thing of the past. Ask Steve Smith if there’s any sanity or hope left in this country.

      • prsmith14@gmail.com says:

        I think Steve Smith deserved the one year ban. He betrayed the exalted position which he occupied. But after that the slate should be wiped clean. He is good enough to come back. As to the rest pgang, depressingly what you say seems spot on.

    • Jacob Jonker says:

      Ha ha, good luck when you roll up to Centrelink. If you haven’t been switched on enough all these years to be now sitting very pretty, with all your hard work, I wonder how you will deal with Centrelink. Anyway, I wish you luck. As for the blog, I will read it tomorrow, but the comments are, well, it makes me laugh and want to cry both. I spent 46 years as a resident taxpayer in Oz and sofar have filed 46 returns. If I had been into investing in the stockmarket or funds for retirement, no telling how rich I would have got, but I should have studied tax law to stay on top, which I was not prepared to do, as I had a life to live.
      Taxation is a mess of pottage pretty much everywhere. It is that for a reason, which the blogger and commenters, other than my exalted me, don’t seem to be able to figure out. In my letters to, mostly the AFR, some published, I have been as forthright about my opinion as I dared, weakhearted or what, but nevertheless, I think few people realise the state of the world since the Seventies. Almost everybody is in it for themselves and their close family, friends, mates. Both government and business have been for decades and are a means to sluice, cream off, siphon off, moneys and other means of gain by any way whatsoever. Tax law is convoluted historically because it was structured to be of advantage to the rich and persons of influence and a coterie of hangers-on who would sniff out how to get the goodies and pay less or no tax. Whenever a scheme became wodely known, I think the time would come to shut it down, with other schemes already on the go, for those in the know.
      Is there a likelihood that some future government is going to clean up this mess? Only if it were a dictatorship, i.e., after the revolution. As it stands, politically, I cannot see a remedy, other than that it continues plus ca chance, plus ca meme chose, or words to that effect. Geoffrey Luck was somewhat hamstrung trying to express himself, but I can’t see how he was wrong in principle. As for the rest, an interesting read, for sure. Will be back.

  • Jacob Jonker says:

    So, I’ve read it. As I thought, a storm in a pea cup. It’s illegal, but they’ve got the police on-side. They set out their little table in the market place and start an argument to draw a crowd. Then one starts the pea’n thimble act and the other starts guessing where the pea might be. In no time some in the crowd are putting their tuppence worth in. It’s politics. If taxation wasn’t unfair, how would they get people exercised? It’s a Punch and Judy show.

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