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Why retirees could be $7700 worse off under Shorten’s tax proposal

retirees smsf self-managed super supperanuation bill shorten sam henderson franking credit refunds tax

If you thought Bill Shorten’s recent policy announcement regarding the removal of cash refunds on franking credits was poorly conceived, you may well be right.

And his reversal of the policy for recipients of Centrelink benefits yesterday may be evidence of policy-on-the-run as a million self-funded Aussie retirees will be staring down the barrel of a 15% pay cut if Shorten is elected.

Shorten, the Steve Smith of finance

Like Steve Smith, Shorten took an instant hit to his popularity after he announced that shareholders will not receive cash refunds of franking credits.

Franking credits are tax credits passed on to shareholders because the company has already paid up to 30% tax. For example, those people who pay less than an average of 30% tax could receive a cash refund.

Franking credit essential to retirees

Franking credits are particularly important to self-funded retirees, many of whom have earned their right to a tax-free retirement following a lifetime of hard work. Self-funded retirees are set take a hit to their income of 15% if Shorten is elected as Prime Minister in the next election in or before May 2019.

Kelly O’Dwyer described the policy as being designed to “crush SMSFs”.

I’d like to see the reaction from the unions if Shorten tried to cut the pay packets of their memberships by 15% a year. We’d quite possibly have war in the streets so you’ll have to excuse the animated responses I’ve seen from ordinary hard-working mums and dads who feel passionately about their rights to the tax refund, many of whom can’t return to the workforce after they’ve retired.

“Mr Shorten’s a bit of a goose”

I too was a little animated on Sky News Business last fortnight when I described Shorten as “a bit of goose” but I was inundated by readers supporting my stance and who felt bitterly disappointed and let down not only by the policy but the smug way in which he delivered the message.

Here are some of the response I’ve seen last fortnight:

The word ‘loophole’ is insulting. It looks like we’re cheating and being devious.”

“He’s an idiot.”

Been a selfie for over 14 years followed the rules, been self-sufficient, no government handouts then these bludgers arbitrarily change the rules.”

“Good on you for speaking out about this issue. I am a self-funded retiree with a million dollars in super – sounds a lot but my wife and I don’t consider ourselves as wealthy. We still need to watch our spending. Further, it appears those people that save and invest their money (and take risks in investing) are penalised by the Labour [sic] Party.”

Insulting and penalising previously hard-working ordinary retirees is bad policy

Shorten also described the current cash refund as a “tidy little arrangement” further insulting self-funded retirees who have earned and rely upon the rebate to meet their basic living costs – which have been rising faster than CPI (Consumer Price Index).

Utility costs, health care and council rates have all been rising faster than CPI.

John Maroney CEO of the Self Managed Super Funds Association (SMSFA) had plenty of fuel to add to the fire.

“These retirees have depended on receiving a refund of the excess company tax paid above their SMSF’s marginal tax rate on company profits to supplement their income in retirement.

“The refunding of excess company tax paid via refundable franking credits has been a long-standing feature of superannuation that SMSF members have built their retirement strategies around,” he says.

“Under Labor’s proposal, the only SMSFs exempt are those that currently have at least one member receiving the age pension.

“And in the future, there will be no protection for SMSF retirees who may need part government support to supplement their superannuation income, creating an unfair, two-tiered and complex treatment of SMSF members who access the age pension in retirement.

“Potentially, these SMSF members are worse off than people with less savings but refundable franking credits and a part pension.

“The end result is to reduce people’s incentive to save for retirement to achieve self-sufficiency.”

Written by Sam Henderson

Sam Henderson

Sam Henderson is CEO of Henderson Maxwell, a boutique accounting and advice firm specialising in SMSF and portfolio management for retirees. He is also the host of Sky News Business’s Your Money Your Call - Retirement.

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6 Comments

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  1. Your example makes no sense at all. The couple, presumably still in accumulation mode, received $7700 franking credit which were attached to their $45,000 income, therefore, they get taxed at 15% on $52,700 = $7,905. Since they already have $7700 in prepaid tax (i.e. franking credits), they only pay the balance of $205. This is the same under the existing arrangements and Labor’s proposed changes.

    However, had their income of $45,000 been fully franked and thus came with franking credits of $19,285, their total taxable income would be $64,285, on which the 15% tax amounts to $9,642. Since their franking credits exceed this amount, they’d pay no tax at all, but presently they get the excess of $9,643 ($19,285 minus $9,642) refunded whereas under Labor’s proposal the excess is simply lost.

  2. Hi Sam,

    Interesting article but I imagine you have a bit of skin in the game as you make a living from managing SMSF’s. In your example I wonder if they moved their super into a decent industry fund that what they lose in franking credit refunds might nearly be saved by reduced admin fees in the industry fund. In any case if the dividend imputation system is meant to stop the double taxation of dividends why do we refund it to those who were not going to pay any tax in the first place. Cannot get my head around that one.

  3. Ian, this may help you to get your head around it: a company, for all shareholders irrespective of their tax rate, is simply a pooling structure. It should not pay tax on earnings it pays to the members of the pool. The fact that it does so, creates the double-taxation anomaly. The best way of fixing the anomaly would be to have a zero company tax rate on all distributed profits (i.e. dividends) and have those distributed profits taxed in the hands of the shareholders only (not unlike what’s happening with trusts). The chance of a zero company tax rate is – well, zero! – which leaves the current dividend imputation systems as the only second-best system around.

  4. My blood is boiling at this article. So much biased self interest. I also disapprove of disrespectful language. No one deserves to be called a goose and I am disappointed that Money commentator who has been flooded with comments would then cherry pick a comment calling a political leader an idiot. I am a teacher of students with special needs. How am I supposed to teach my students to be respectful when reputable finance journalists cannot. Have standards fallen so low?

    Also I don’t see what the fuss is? Why can’t SMSF restructure their asset selection to things that don’t have Franking credits? Also I think we have significant growing deb. I think everyone has to contribute to solving the problem and my understanding that Australia is the only country to return them anyway.

    Once again I am very disappointed with this article and I am not sure if I will renew my subscription. I get my biased opion pieces from the AFR. I don’t need to read them here.

  5. Hello Sam

    An important thing that seems to be missing from all the discussions on this issue is: do we HAVE TO leave money behind, when we die? Isn’t it fair that self-funded retirees actually use up those funds that they have accumulated, say in the last few years of life, in order to support themselves? Rather than just the income from those funds. Ok, so we don’t know exactly when we are going to die, I get it. Nevertheless, we can have a good guess at it, and in our last year or two we may well not want or need anything other than the most modest of lifestyles. I wish my mother had used her money to enjoy herself – she worked hard enough for it. But she was in permanent ‘thrift’ mode, right up to the end, when she had no necessity to be. Silly. Sam, I would love to hear your thoughts on this.
    Sue

  6. I do not understand the calculations on Franking credits being a loss of 15% on the income of a self funded retiree.
    It is actually 30% loss of income in my case having a portfolio of Australian shares with the majority being 100% franked.
    Signed Richard in Sydney

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