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Ask Paul: I’ll lose $50,000 in franking credits under Labor

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Q. My wife and I have a self-managed super fund that stands to lose about $50,000 in franking credits should modified tax rules be imposed if a Labor government is elected.

What alternatives do I have to maintain my income? – Thomas

A. Many of us are in the same boat, Thomas. Personally, I am going to wait to see the detail and timing if we do get a change of government next year.

Like you, I don’t want to see any excess franking credits that are in my super fund go to waste.

A change in strategy has to wait until we know the exact details, but I suspect many people will look at their assets inside and outside super and plan accordingly.

While I hate shuffling my investments due to changing tax rules, it may be necessary.

If we do get a Labor government, Money will analyse the rule changes and provide potential solutions.

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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  1. Am I right in thinking that franking credits equate to about a 1.4% return on your capital if the dividends are fully franked? If so then $50,000 means a capital value of about $2,570,000 in investments paying fully franked dividends. Assuming a reasonably balanced portfolio where shares make up half to two thirds then the overall value would be such that $50,000 is not a major drama, in fact a problem I suspect many would like to have??

  2. Thomas and his wife have probably worked very hard, been sensible with their spending and intelligent with their investments for a long time. And whatever they did, they did it u see the rules of the day.

    With their level of income they are saving the taxpayer $36K per annum in age pension benefits foregone. They also won’t qualify for other “benefits”, saving the taxpayer further money.

    Their reward for their success is to have $50k per annum stripped from their income.

    This policy is outrageous.

    • Gen X and Y won’t qualify for any of that because there won’t be enough money when they retire. Where’s your concern for them ?

  3. Tony – their $50k in annual franking credit refunds (on a capital value of $2.5+ million) means that taxes for other people such as median wage earners need to be much higher to compensate.

    I would suggest that they are in fact costing the taxpayer much more than the value of the age pension. Do some research on the cost to the budget of Super tax concessions and you will see.

    • Thanks for you comment Martin.

      We shouldn’t conflate two issues. Refundable franking credits and super tax concessions.

      If Labor believe that Superannuation tax concessions need to change then they should put a policy on that to the people.

      • Totally agree – I would be in favour of a 15% tax on pension earnings. This would be the answer to mitigating some of the problems we currently see, and would result in a better outcome than the proposed policy in my view.

        It’s just the 0% tax rate on pension earnings in particular exacerbates this issue.

        You have this ridiculous bleating from the Government that low income earners are being penalised the most. Well of course, if they are citing taxable income stats. Since pensions are exempt from the tax system, you have pensioners like our Ask Paul questioner on $180,000 a year being counted as low income!

    • Martin, you obviously do not understand franking credits to begin with.
      Besides this attack on our savings by dirty Labor, the Termite government had already started taxing super on income earned from funds over $1,600,000. This limit was never mentioned by government during the years we were locking our hard earned money away in a super fund so we could live a comfortable life in retirement without having to bleed off today’s taxpayers. I would have loved to have worked less hours, had more recreational time, toys & holidays during my working years.

      • Alan, I understand the franking system perfectly, and yes I understand the problems with the Labor policy. But it’s good they have started a conversation on it, because it needs to be had.

        The change the government brought in for balances over $1,600,000 was to address the sustainability of the system, because people like yourself are essentially getting a free ride.

        Even still, you get pension earnings on your $1.6m tax free and only above that do you pay a modest 15%.

        You’d have to earn almost $200,000 within super to pay the same amount of tax your children and grandchildren would pay on a median type wage of about $70k.

        How is that fair? Please stop your over the top woe is me attitude and recognise how good you have it over everyone else. It really is sad to see people like you say “everyone should pay tax except for me”.

        • Martin – aren’t we forgetting something here? What about all of the tax that said individuals getting a ‘free ride’ in their self funded retirement have paid throughout their working lives? What is the cumulative ‘hard dollar’ amount of this? Why isn’t this ever mentioned in adult conversations about what is ‘fair’. If I was them – I’d be asking others to “JST” (eg. Just Say Thankyou). Most people who get to a position to self fund in retirement don’t get their through luck. Most of them didn’t inherit their jobs or businesses which they toiled away in. Wouldn’t it be great to see retirees recognised for their total ‘hard dollar’ tax contributions that they’ve paid through their lives (to governments of ALL persuasions) – and for our society to THANK them for their contribution – instead of the current situation which sees many of them being vilified for not paying enough tax….
          It believe is non-sensical to compare the tax they pay in their retirement to their Grandchildren earning a wage.

  4. Martin – franking credit refunds are not a super tax concession. They are an element in achieving taxation fairness between investments through corporate structures and those in other structures. The credits represent tax paid by the company on the individuals behalf – and so should be refundable to all individual Australian taxpayers For this reason, it is worth noting that under Labour’s plan, higher income earners like politicians will still get the refunds while low income earners will not.

  5. Tony you have my vote, people that scrimp and save, who are prudent with there money, who send there children to private schools, thereby reducing the burden of education costs on tax payers, people who take out expensive health insurance, freeing up the heath system, and those self funded retirees who don’t go cap in hand for a state funded pension at age 60, should be applauded as model citizens, not penalized because they are the easiest option of capitol raising for governments that have miss managed the purse strings

  6. John, I couldn’t agree more.

    Unfortunately, not many people fall into the category of person that you describe.

    I believe the stats are than less than 40% of voters pay net tax and less than 60% make a net cont rovution to government costs (I.e once costs for thing such as govt provided education and health are taken into account). Basically, the top 20% pay for everyone else.

    It is simply politically expedient to continue to take from the minority and give to the majority.

  7. I’m with you John and Tony. “Unfortunately” my wife and I fall into the category of working hard all our working life, PAID our taxes all they way and saved a modest amount of money for our retirement not to be a burden on the Government in any way. Now Bill Shorten wants to steal that hard earned money from us. We are both Aussies and come from hard working backgrounds and always paid our dues. It is just not fair and definitely not the Australian way. We are extremely disappointed that the Labor Government has even contemplated this action.

    • You paid tax too ? Guess what, so did everyone else. It doesn’t make you special.

      In fact, Gen X and Y are the ones who will also lose out because EVERY super fund in accumulation phase is a 15% MTR and franking credits cost us money too; you don’t hear about that though.

      Why do the boomers think that they are so special because (a) they paid taxes and (b) they will be ‘self-funded retirees’ ? Everyone in Gen X and Y will have to be because there isn’t enough money to go around.

      Boomers had a choice – be independent, self funded retirees or rely on the Government. Unfortunately, many were daft enough to do the latter and then claim “oh, it’s because we never had enough money to do the former”…garbage, you cut your cloth accordingly, it’s called “live within your means” and be smarter with your money. That’s why Gen X and Y, from NECESSITY, will be able to do both.

  8. John, I understand where you are coming from.

    If you are retired and have your retirement funds in super, you will be able to plan around the rules.

    Talk to your tax and financial advisors. They should by now have a plan around this issue for you.

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