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Franking credits: why I called Shorten a goose on national TV

bill shorten labor imputation franking credit refunds super smsf retirees malcolm turnbull chris bowen scott morrison sam henderson budget election ato tax pension franking credit franking credits

Opposition Leader Bill Shorten announced yesterday that imputation credits resulting in a cash refund would be abolished by July 2019 if he becomes prime minister.

Imputation credits are a tax refund owing to shareholders of companies where up to 30% tax has already been paid by the company.

If you pay less tax than the company tax rate then you can claim a refund.

The resultant change could reduce investors’ cash flow by many thousands of dollars and turn them against the sharemarket.

Worse still, self-funded retirees could see their incomes cut by $5000-$10,000 a year on average for a self-managed super fund member.

Self-funded retirees are simply hard-working Australians, many of whom have paid tax all their lives, saved diligently and done all the right things to release themselves from the burden of the age pension for the benefits of other taxpayers and those more vulnerable.

But in past years access to the age pension has been restricted, a pension transfer balance cap of $1.6 million has been introduced and now imputation credits may be abolished under a Labor government, further eroding their incomes.

The reason I called Mr Shorten a goose is because he described self-funded retirees as receiving a “tidy little arrangement” and was further quoted in his speech as suggesting “every dollar that slips through these loopholes is a dollar that cannot be invested in the Australian people and their potential”.

Well, Mr Shorten, let me remind you that the average SMSF – 200,000 or more of whom will be affected by this change – has around $1 million invested and is not enjoying a lavish lifestyle.

In fact, as interest rates are so low and dividends across the market average about 3.25%, they’ll be lucky to be pulling out $35,000-$60,000pa  at best.

That’s only just above the poverty line – hardly the lavish lifestyle of the rich and famous as described by our potential prime minister.

As imputation credits could account for between 0.5% and 1.5% of a retiree’s income, this could range from $5000 to $15,000 a year as a conservative estimate.

On an income of, say, $45,000pa,  we’re potentially talking about a 20%-30% pay cut for retirees, who would be lucky to get 2.5% in a term deposit.

As retirees eat into their lump sums they’ll almost certainly have to place additional pressure on the age pension system and potentially have to return to work.

So, too, retirees will be looking  for riskier asset classes such as unlisted property trusts to glean a higher yield and maintain their standard of living.

So don’t be a goose, Mr Shorten, and suggest that our hard-working retirees should take another pay cut, because they deserve much better treatment than this.

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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  1. So what is to stop companies paying dividends out of pre-tax income rather than post-tax income? For example, instead of paying $700 in franked dividends with a $300 franking credit, simply pay $1000 in unfranked dividends. Franking credit refunds then become irrelevant, and you could easily put enough aside to cover your income tax liability and earn some interest before your tax bill is due to be paid.

    • Because that is exactly why the Hawke-Keating government introduced franking credits.
      If you distribute company profits through unfranked dividends then the company is unable to distribute credit for the tax it has previously paid. You are therefore effectively taxing the company profits twice: once in the hands of the company, and then in the hands of the shareholder, when you distribute the profits as dividends.
      Unfortunately the real story behind this half-baked policy is, how did Shorten and his team fail to recognise the ‘pensioner’ consequences of this strategy. Once announced, they had to immediately implement a significant re-work of the policy. Suggesting there had been no serious consideration or analysis of flow-on effects.
      It is this fact, together with the absolute bedlam within the Coalition party room, that unfortunately highlights the parless state to which public policy and political leadership has descended.
      Everyone, it seems, is turning brain-farts into policy statements, simply in an effort to address the perceived issue of the day. Little, or no, genuine intellectual rigour is being applied as to how this will play out over the long-term. No-one would run a business like this, how do they expect to be able to run a country?

  2. Well put Sam, this is a case of changing the rules after retirees have made lifetime decisions on how to finance their retirement, providing for themselves and taking pressure off the Gov’t Age Pension this will cost me 10 to 15% of my current modest income, a pay cut that will be felt by many if Labor go to the elections with this policy.

    • Not just retirees, anyone else who has a superannuation account. It affects everyone because even in accumulation phase at 15% tax rate (for those who are working), those franking credits are still being refunded.

      Taxed on the way in, taxed whilst it’s in there and taxed when it gets taken out unless you’re over 60….all the while subject to the vagaries of myopic politicians who can’t see past the next four year term and who change the rules more than a Premier League football strip design. Welcome to superannuation.

  3. Ken.
    A retired person with a modest super balance of say $300k earning $18000pa with imputation credits would lose $5400, leaving them with $12600. Over $100 a week worse off. How many people do we all know who are on this magical figure in excess of $1 million, Shorten, Turnbull, Abbott, etc.
    If Shorten was really serious about tax reform then address the real rort that is family trusts, placing a minimum 30-47%% tax on all income received instead of zero I think would appeal to the majority of hard working and retired Australians, but this would affect Shortens hip pocket.
    The other is to place a decent royalty tax on all resource exports from multinationals.

    • Not after tax, that’s ‘tax free’ (thanks to franking credits) and / or the over 60 tax free rule !

      The equivalent would be a wage before tax of about 90k

  4. Would retirees lose franking credits on Bank Hybrids thereby reducing returns, the market price and result in a capital lose?

  5. I am one of the self funded smsf retires.l do not have a million dollars but have just lost my part pension because I was over the cap. Now this idiot says I am rich and intends to take the franking credits to give to the poor.i am sevent five and my wife seventy four ,have worked and paid taxes all our lives and am discusted at present level of political parties now that think we’re cash cows who can be milked for extra cash

    • and I, with all my Gen X and Y brethren will have paid taxes all our lives too and will be the real ‘self funded’ retirees because there won’t even be a part pension when we retire…your point is ?

      • His point is that there is pretty much no part pension now – you are either poor and get the full pension, or moderately well off (in today’s terms) and get nothing.
        A lot of us ‘baby boomers’ won’t get a pension – even a part pension – we will have to look after ourselves. And we didn’t get any of the handouts that Gen X and Y receive – first home owners grants, baby bonus, child care subsidy, Family benefit part A and B.
        We have had to finance our own way all the way – at 17 % interest on our home loans, and pay tax with no subsidies from Government. In our old age we will still be paying for ourselves, and we have paid taxes all our working lives.
        I cannot believe the handouts that are available to everyone now – no wonder the Government has no money to pay a pension – they are too busy paying out to gen X and Y, and figure we oldies have done it the hard way, and can continue on doing it.
        . There are plenty of self funded retirees doing it tough, and they are not drawing on Government funding, so need some avenues of supporting themselves.
        Sorry, but I get a bit sick and tired of the baby boomer bashing

        • I love baby boomer bashing. They forget their free uni, job for life, cheap housing and massive share market and property booms. Plus they love wheeling out the 17% interest rate comment without understanding those lazy gen x, y and z are paying more as a percentage of income now than at the top of the 17% rate. Yes, it’s worse now for the younger generation than at the deepest darkest hour for baby boomers. Frankly if the boomers had been taxed at a higher rate for the last 40 years, then we would be able to support their lavish pensions, sadly they didn’t and now they want to dodge their commitment to Australia while calling the rest of us lazy😆

          • Baby boomer bashing is a sure sign of a tiny intellect that cannot discern the real causes of today’s malaise.

      • So would you be happier with an inheritance tax and take a bigger pension later on because you will need to.
        I thought not.

  6. Dean
    The unfranked dividend will still come out of after tax profit so there will be 30% less income to pay out meaning the company can only pay out $700.

  7. Yes, this will affect retirees the most and those nearing retirement and winding down work.

    It is not clear cut whether this is good or bad policy overall, if you think about it, it effectively means the company has paid no tax on profits as the amount is then refunded to the individual (remember similar overseas countries don’t allow full refund of credits), of course it is worse for retirees if they are invested heavily in Australian shares. Although, we should remember, the pension payments after 60 are tax free.

    I think what Sam misses is the amount in retirement is actually supposed to be spent (not a wealth preservation vehicle) – so drawn down principle! I’m an accountant and I can tell you there are many people out there who accrue franking accounts and then pay dividends and receive the franking credit refunds (not just in SMSFs, but through Family Trust and Corporate Beneficiaries). Do I think it is fair to do this? Not really, when you consider most working people just pay at least 30% tax every year and some 50% plus. I think super is definitely used as an Estate Planning vehicle, which is fine, but lets acknowledge that is how it is being used in many circumstances. Labours proposal around income from super being taxed when over a certain amount, made a lot of sense in my book (better than this proposal).

    Also are the readers aware that Franking Credits were not refundable until rule changes around 2000? Of course Howard gave a big free kick to older workers in the past, which is far less now with the limit on annual payments into super, but super is still the best investment vehicle for those over 50.

    • Thanks Chris, for looking at the bigger picture. If we consider that companies should pay tax it makes no sense at all to “refund” unused franking credits to non taxpayers. I understand the concept of avoiding double taxation of company profits paid out as dividends, but to avoid all tax on those profits cannot be good policy.

      The fact that the “refund’ of unused franking credits is paid to the shareholder by the ATO makes it seem that it is refund of their taxes – which it is not as the shareholder has not paid the tax in the first place. The “refund” is a payment from the government from it’s other tax revenue ( in this case from company tax receipts) – in most peoples view a payment from the government is a “benefit” or “welfare”.

      Do the self funded retirees who pride themselves on not being a burden on the state not realise that these payments are a burden on the state??

  8. So if younger generations (students etc.) decide to save and invest for their future in shares with franking and happen to fall under the 30% tax threshold and edible for any returns, they to will also be affected by this not receiving any refund? If this is there case, everyone is being clipped!

    • Yes, this is not aimed at retirees – but it does affect a lot of them as they take advantage of the current (since 2000) classification of franking credits as REFUNDABLE tax credits available to all.

  9. It’s happening out of necessity, because there just isn’t enough money to go around and is a function of the people who are paying tax already (and by the way, will also have paid taxes all their lives too, so that renders the boomer counter argument redundant), in that there isn’t and won’t be enough taxpayers to foot the bill…it will fall down to Gen X and Y to do so. It is simple fact and numbers.

    It is a problem of the Government’s own fault (getting people to stick that much into their super in the first place), now they are finding out that saying you can get your super tax-free after 60 is expensive….well, duh ! What used to cost $500m now costs $5b according to the ABC radio.

    On the one hand, I don’t see why it is appropriate that someone who is earning 60k a year inside their super fund (already tax free and which would have to be an easy, average 5% return – for example, CBA at $4.30 and $74.89 is a 5.7% yield, and a refund of franking credits means an even higher yield) pays no tax, yet someone working as a salary earner and earning the same income pays tax at 30%.

    On the other hand, I can see that you need to incentivise people to save for their retirement through the carrot of superannuation (a system that has goalposts that are always changing…24 different changes in the past year alone) and the stick of ‘there won’t be an aged pension when Gen X and Y retire (for the above reasons), but the design of how you do it has to be smarter. Giving one generation huge tax breaks and incentives at the future expense of everyone else just shows what a massive pork barrelling exercise it is to win the boomer votes (as the biggest voting block).

  10. Oh cripes save me . Australian polies what a joke every first world country in the world recieved an aged pension on retirement if taxes have been paid over 35 years and private pension s are taxed . Much fairer. I would love a pension . These people who criticise Oder people for saving for their old age are so shortsighted your turn will come and I bet none of you will save extra for super. Much easier to spend your money and have a good time than sacrifice for your old age . What most of you who denounce self funded super pensioners is we do not get a pension electric allowances half price car registration , telephone and internet allowances . Free X-rays and numerous other benefits if an age pensioner fumded by the tax payer. Oh and we dont get as a couple 40 thousand dollars a year . And for us to recieve that we have to have 800 thousand in a fund and finance our pension with our saving s over a lifetime . Oh and we cant give much away to our children as the tax department deem we still have it for five years . How many of you people will join us now in saving for retirement . Should have had holidays and spent ours we would be just as well off as a government funded pensioner

  11. We are a couple of hardworkers. Retired 16 years and never collected the pension.paid tax all our life and saved the government $600,000 plus to date .Save$ 25,000over 32 years $ 800,000 denies you any pension or benefis$25,000 ovler 64 years gives you $1,600,000 if you start work at 3 years old .Super supports not only you but youir wife and dependants . and I believe unsuntainable by the government Live it up and let the government keep you while they can. AlEllowing $25,000 deposits on houses ,hardships , stomach tightening operations now allowed decreasing monies to $300,000 destroys inititives Bill Shortens okay with his government pension provided by us

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