Taking the political gamesmanship and vested interest of those affected in the Australian superannuation industry out of this issue to find some kind of consensus on four critical questions from people with no apparent ‘skin in the game’ is no easy task.
1 How many will be affected by this policy;
2 Who exactly will be affected by this policy;
3 When will these people be affected by this policy; and
4 How much will it affect their income flows per annum .
What is a dividend imputation?
When Paul Keating designed the dividend imputation system in 1987, the thinking was shareholders would offset their tax liabilities, not that they would have no tax liabilities to offset.
This system was introduced to ensure the same money is not taxed twice – once at company level and then again in the hands of the shareholder.
The Howard-Costello government went a step further and changed the system so the credits didn’t just extinguish your tax bill to zero, but any excess credits became a debt that the government needed to refund the taxpayer in cash.
With encouragement from financial planners and accountants, many people in this demographic then structured their investments around the tax break.
Baby Boomers set up DIY funds so they could ensure the fund invested to the hilt in Australian equities and raked in the refundable franking credits.
Source: Caitlin Fitzsimmons Real 'victims' of Labor's dividend tax policy are not average Joannes. SMH 24 November 2018.
People with substantial assets and big super balances were also in a position to report low taxable income and structure their affairs to ensure they have low taxable income.
Source: Cited in Factchecking Coalition claims: is Labor going after Mum and Dad's savings? Katharine Murphy The Guardian 14 March 2018.
Then Treasurer, Scott Morrison told Sky News 97% of people claiming cash refunds had an annual income of $87,000 or less, a misleading statement given the difference between “an income” and taxable income.
The individuals claiming this ‘cash benefit’ do not pay tax on their self-funded Superannuation after they turn 60, nor do they pay any tax on personal savings accounts. Most of these people do not earn any ‘taxable’ income .
Morrison also claimed the proposal Labor would be unfair to lower income earners because the policy would allow high income earners with shareholdings to access the full value of franking credits, but part pensioners and self-funded retirees would not.
“It cannot be fair that someone who’s on a low income cannot be given the full value of the franking dividend that someone on a higher income can,”
Scott Morrison declared Labor "is stealing tax refunds from pensioners and low-income retirees."
Former Liberal leader and current university economics professor, John Hewson observed that
“If the income we are looking at is $87,000, how much do people have in assets to earn $87,000? A million to a million-and-a-half in assets?”
Then Prime Minister Malcolm Turnbull claimed Bill Shorten
“is going after the savings of your parents and their friends and their contemporaries”
This claim was received by some as a blatant attempt to mislead the public, implying that Labor was planning a raid on banking institutions to “steal” from the savings accounts of age pension recipients and self-funded retirees.
Source: cited in Factchecking Coalition claims: is Labor going after Mum and Dad's savings? Katharine Murphy The Guardian 14 March 2018.
Vested interests were quick to react to this policy announcement.
Unaffected, industry super funds had little to say about the policy announcement. However, the Chief executive officer of the Self-Managed Superannuation Funds Association, John Maroney, put out a press release with the alarming claim that the policy would impact on
“..more than one million Australians saving for their retirement and other purposes. Our calculations show it will cut about $5,000 of income from the median SMSF retiree earning about $50,000 a year in pension income. To be saying these people won’t be paying any more tax is just semantics. This hit on retirement incomes clearly is not just affecting the very wealthy and can substantially damage the lifestyles of retirees who have prudently saved and are carefully drawing down on their retirement savings”.
SuperConcepts, which provides services to Self- Managed Super Funds argued Labor’s policy would “hit the lower end of retirees”.
Their definition of a 'lower-end retiree' is someone with $900,000 in an self-managed super fund at age 65.
Source: Caitlin Fitzsimmons Real 'victims' of Labor's dividend tax policy are not average Joannes. Source: SMH 24 November 2018.
With no apparent vested interest, Economist Saul Eslake thought the Government’s political posturing on this issue was
“misleading in the same way that most of what Scott Morrison said about Labor policy on negative gearing was misleading”.
-John Howard converted “something that was only of value if people had a tax liability to something that was worth cash in hand.”
That change has conferred a “huge benefit” on people with significant assets and a substantial non-taxable income.
-The policy which was forecast to cost tax payers $500m now runs into the billions annually largely benefits people who are fully capable of total financial independence.
The practical effect is people are getting a tax refund despite the fact they pay no income tax, at other tax payers expense.
- There will be a small subset of self-funded retirees with low total incomes (as opposed to taxable income) negatively affected.
Labor conceded the decision to end dividend imputation cash payments would impact on 14,000 full Government pension recipients and 200,000 part pension recipients.
People in this category of low actual income who end up losing a low cash refund income stream may become eligible for a larger pension because it would change their Government pension income test outcome.
Reporting on Saul Eslakes comments, political journalist Katharine Murphy concluded that the Coalition was
“deliberately over-egging the impact of the change, hoping to amplify the inevitable outrage from self-managed super funds and seniors groups”.
What about Grandfathering the policy ?
Economics Professor John Hewson noted that it is not fair that the tax system is furthering the interests of people with the resources to look after themselves, yet the fairness question is more nuanced than the way Labor is framing the debate.
Hewson argued Labor would have been smarter to frame the reform with transitional arrangements or a grandfathering mechanism because
“it’s also not fair that a generation have structured their financial position in retirement in good faith, only to have the rules change”.
Labor would later argue that there is no need to grandfather because it’s giving people plenty of notice to adjust their arrangements, with a July 2019 start date.
Brendan Coates and Danielle Woods from the The Grattan Institute wrote a paper on ‘The real story of Labor’s dividend imputation Reforms’, published by Inside Story on March 20th 2018.
- Labor claims most of those hit by the change are wealthy retirees who are not paying their fair of tax.
- Scott Morrison claimed that
- Abolishing refunds of unused imputation credits will mainly hurt low-income earners.
- 54 per cent of people affected by Labor’s policy
— some 610,000 individuals
— have taxable incomes of less than $18,200, and
- 86 per cent of the value of all franking credits refunded are received by those with taxable incomes of less than $87,000 a year.
The Grattan Institute paper found that the Morrison claims were deeply misleading because
- Taxable income ignores the largest source of income for many wealthier retirees: tax-free superannuation.
- Most of those affected by Labor’s policy who declare taxable incomes of less than $18,200 a year are far from being low-income earners. They are either part-pensioners, or not receiving any pension at all. They are drawing much of their income from tax-free superannuation.
- When superannuation withdrawals are stripped out from income in ABS survey data, as is done to calculate taxable income, almost half of the wealthiest 10 per cent of over-sixty-fives report incomes of less than $18,200. On average, though, they have wealth of nearly $2 million before considering the value of their home or any other property assets they might own.
- There will be examples of seniors with low incomes being hit hard by the change. But media reports highlighting their plight rarely tell the full story.
- About 33 per cent will be paid by (mainly wealthy) individuals who own shares directly, 60 per cent will be paid by self-managed superannuation funds (typically held by wealthier retirees), and the remaining 7 per cent will be paid by super funds regulated by the Australian Prudential Regulation Authority, and
-Among self-managed superannuation funds (primarily held by wealthier retirees), half of the refunds are currently going to people with balances over $2.4 million.
Source: Factchecking Coalition claims: is Labor going after Mum and Dad's savings? Katharine Murphy The Guardian 14 March 2018.