Retiree Stuart Smith says he feels like he's about to be robbed by highwaymen. Under Labor's proposed franking credit changes, he and wife Ruth will kiss goodbye to $18,000 a year in franking credit refunds.
That's just over a third of their combined annual income of $58,000. "We feel as though we've run into Ned Kelly on the road. His gun is pointed at us, we're being held up and it looks as if we're going to get robbed."
It is important to note that the shot won't be fired for some time, if at all. Labor first has to win the next federal election and then get its policy through the Senate, which could be as fractious as the current incarnation.
Nevertheless, self-funded retirees are rattled, and rightly so. Making excess franking credits non-refundable would strip $5000 from the annual income of an average self-managed super fund worth $1.1 million, according to the SMSF Association, which estimates about a million people will be affected even with Labor's "pensioner guarantee" carve out.
Opposition leader Bill Shorten was exposed to criticism that he was going after people on low to modest incomes, not just "millionaires". ABC
Let's pause for a quick refresher. Under Australia's system of dividend imputation, shareholders receive franking credits to account for tax paid at the corporate level, which in most cases is 30 per cent. These credits can be used to offset tax owed by the shareholder.
For people who pay little or no tax (such as super funds and retirees), excess franking credits are paid out as cash refunds. Labor plans to make those credits non-refundable for everybody except people drawing a government-funded age pension or other allowance. There is also a temporary reprieve for some self-managed super funds..
"Labor is cracking down on a loophole that gives tax refunds to people who have a lot of wealth but don't pay any income tax," the party's policy material says.
"Most of these refunds go straight into the pockets of a few very wealthy people who are already very comfortable. In fact, 80 per cent of the benefit accrues to the wealthiest 20 per cent of retirees."
When Labor first announced the policy in early March, it was met with a public backlash. Opposition leader Bill Shorten was exposed to criticism that he was going after people on low to modest incomes, not just "millionaires".
Retired police officer Steven Apps says politicians seem determined to erode people's ability to fend for themselves. Tash Sorensen
Prime Minister Malcolm Turnbull spent a bit of time hammering the point before Shorten announced a "pensioner guarantee". This spared more than 300,000 low-income retirees from the effects of the policy.
Judging by the letters received by The Australian Financial Review, there is much confusion about who's in and who's out, which mostly arises from the use of the term "pensioner".
Labor's exclusion applies specifically to people receiving an age pension – either full or part – or allowance from the government (of the type Centrelink pays). It does not apply to account-based pensions drawn from superannuation funds, including self-managed superannuation funds (SMSFs).
To make matters more complicated, Labor also announced an exemption for SMSFs with at least one member receiving a government age pension on or before March 28, 2018. Unless your arrangements were in place before that date, the exemption does not apply.
If Labor gets elected and the proposal passes into law, the policy will take hold from July 2019.
In the interests of absolute clarity, here is the precise wording of the announcement: "Under the pensioner guarantee, every recipient of an Australian government pension or allowance with individual shareholdings will still be able to benefit from cash refunds.
This includes individuals receiving the age pension, disability support pension, carer payments, parenting payment, Newstart and sickness allowance."
A further exemption applies to "SMSFs with at least one pensioner or allowance recipient before March 28, 2018".
Retiree Geoff Grimley says his household would lose up to $30,000 a year. supplied
So if somebody with an SMSF retires today and starts receiving a pension next week, the reprieve does not apply.
Again, this is all dependent on Labor getting elected and passing laws to enact the policy, which is why financial planners are advising clients not to do anything just yet.
It is this uncertainty that bugs many, including the Smiths, who live in a two-bedroom apartment on the Gold Coast. The couple started account-based pensions in 2013. Their SMSF is largely invested in equities/hybrids and they therefore rely substantially on cash refunds of franking credits.
Each of their account balances is below the $1.6 million transfer balance cap limit and they have never drawn a government-funded age pension, either in part or full. They are precluded from doing so by the assets test.
The government mandates a certain rate of drawdown for each pension – Ruth's rate is 4 per cent and Stuart's is 5 per cent. Combined they received $58,000 in the financial year to June 30, 2017 and of that just under $18,000 was cash rebates of franking credits.
"We feel as though we've run into Ned Kelly on the road. His gun is pointed at us, we're being held up and it looks as if we're going to get robbed." Gabi Harris
Story Wealth Management managing director Anne Graham looked over the Smiths' tax return. "If there is no refund of excess franking credits as per the proposal, then they will lose the refund in total," she confirms.
"From an investment perspective, that affects the rate of return and income earned. It doesn't necessarily impact the amount of pension they draw down. But because the overall return will be lower, the funds will run out sooner."
That funds will run out sooner is a point made by many critics of Labor's policy. Won't this policy push people on to the age pension sooner and therefore end up costing the government more?
According to official costings by the Parliamentary Budget Office, making franking credits non-refundable will increase federal revenue (any time the government denies a tax break it collects more revenue) by $10.7 billion in its first two years and $55.7 billion over a decade.
Labor has not released the PBO figures (although to be fair, this is common on both sides of politics). Nor is there any data available on what affect the policy will have on rates of reliance on the age pension.
"The unfortunate aspect of the proposed change is that members in pension phase who have based their decisions on the rules of the day will be significantly impacted by the loss of refunds," Institute of Public Accountants senior tax adviser Tony Greco says.
"Retirement planning requires stability, and this constant tinkering with the goalposts is creating a loss of confidence in the superannuation system, especially for those who cannot re-enter the work place to make up for any loss in income to support their lifestyles when adverse changes are retrospectively made."
While many financial planners have decried the proposed changes, Perth advisor Philip Carman says Labor's policy is fair and necessary. He believes the Baby Boomers have had it too good for too long. "Getting this refund is beyond the pale," Carman says.
"We've all got to be citizens of the country and say, hang on, what's fair and reasonable? What can we afford?" At 64, Carman just makes it into the Baby Boomer generation. He has yet to retire and has an SMSF, which means he sits squarely in the demographic Labor is targeting.
Retired police officer Steve Apps, who faces a loss of income of as much as $30,000 a year, says politicians seem determined to erode people's ability to fend for themselves.
Geoff Grimley, who started out as a tradesman before moving into general management, is in the same boat. "We're looking at a hit of between $28,000 and $30,000, or about 25 per cent of our income," he says.
Of course, many investors - and their advisors - are already thinking about what to do if franking credit non-refundability does come to pass.
The obvious option is to rejig shareholdings, perhaps to property, stocks whose dividends are either partially or non-franked and international high-yielding shares.
Michael Hanninan, superannuation special counsel at SUPERCentral, says other possible reactions will include transferring money from retirement-phase accounts (where zero tax applies) to accumulation-phase accounts (which are taxed at 15 per cent), or inviting others still in accumulation phase into the fund. These options would mean the fund has tax liabilities against which franking credits can be offset.
That people with SMSFs might move their money into retail and industry funds owned by banks and unions has also been well canvassed.
"These funds are likely to have a very significant tax liability against which the otherwise excess – and lost – imputation credits can be offset," Hallinan says.
Perth adviser Philip Carman says Labor's policy is fair and necessary. TREVOR COLLENS
"The retirees would have to be confident that they received the benefit (or most of the benefit) of the otherwise excess imputation credits. Additionally, this response would only be feasible if the transferred balance consisted entirely of cash or listed securities."
At a public policy level, the government ought to be wary about narrowing the gap between the level of income a couple can expect as self-funded retirees and the income they can expect as age pension recipients, says Jason Delisser, the director of F3 Financial Services says.
"It's hard enough to get people engaged about planning for their retirement and financial future in the first instance," he says.
"If the outcome or lifestyle from having a larger pot of investments – that is, no age pension income, no pensioner concession card and no franking credit refunds – is not that dissimilar to having a smaller pot of investments, there is not a great incentive to accumulate the larger asset pool and either become self-funded or remain self-funded.
"My view is that the proposed franking credit policy will contribute to this narrowing of the gap between the two alternatives."
By Joanna Mather
13 April 2018