The Labor Party's proposal to cancel cash refunds for excess dividend imputation credits is not just bad policy, it's iniquitous. The SMSF Association does not say this lightly. But it's the only conclusion that can be drawn from Labor deciding that anyone who has a self-managed superannuation fund (SMSF) can be labelled wealthy and stripped of their cash refund.
Most of these retirees (overwhelmingly husbands and wives) are not wealthy – and certainly not in terms of income. Based on the average SMSF balance of about $1 million and a fully-franked share portfolio totalling 40 per cent of an SMSF's assets, it will mean current annual income of about $50,000 will drop more than 15 per cent – or about $150 a week.
But because SMSF trustees have had the temerity to take politicians at their word and become self-sufficient in retirement and not go on to the age pension, they are being targeted by Labor searching for extra spending dollars in the run-up to the next federal election.
Based on Labor's sums, the proposal could raise revenue of $55 billion over 10 years. But the reality is it will reap far less because it's poorly-designed policy – and will undermine confidence in super on the false premise it will deliver a fiscal bonanza. Anyone doubting falling confidence need only look at the recent Roy Morgan survey showing voluntary contributions fell from 25.5 per cent of fund members in 2010 to 20.8 per cent now.
But SMSF trustees will have options – and will respond accordingly. Asset allocations will change away from fully-franked shares, in the process removing the stability the $720 billion SMSF sector (with an asset allocation of more than 30 per cent in domestic shares) has brought to the blue chips' share registers.
Another option will be to include extra members with taxable contributions in SMSF funds, or trustees could reduce their assets to claim a part pension. Encouraging retirees to draw down capital to go on the age pension will negate much of the cash benefit Labor hopes to reap.
When Labor first released its proposal, people on the age pension were included. But the ensuing public outcry saw these pensioners quickly excluded, and Labor has repeatedly said since that most members of retail and industry funds will be unaffected by the reforms because imputation credits are offset by tax liabilities.
Labor's rationale is that Australia can no longer afford to give out cash refunds – in its words it's projected to cost the budget "up to $8 billion a year" over the next 10 years.
Let's have a closer look at this. The budget can't afford cash refunds on which SMSFs have built their retirement strategies for nearly two decades, but can afford tax offsets (significantly larger than the cash refunds) that every individual with a franking credit enjoys, despite the obvious fact there is no difference to the budget bottom line between a tax offset and cash rebate.
Taking Labor's policy logic to its obvious conclusion, it could be argued that we can't afford any tax offsets. But Labor is not going down that politically treacherous path. It's easier to get a quick fiscal hit by targeting "wealthy" SMSFs.
The inequity of this proposal is further exemplified by Labor excluding some not-for-profit organisations, including trade unions. Evidently these organisations are deserving of an exemption but a person who has worked an entire lifetime to be self-sufficient in retirement is not.
Finally, Labor says it will exempt SMSFs with at least one member receiving a pension before March 28, 2018 from the proposed changes. Called the Pensioner Guarantee, it again highlights the inequity of Labor's proposal.
After this arbitrary date, there will be no protection for SMSF retirees who may need to rely on partial government support to supplement their superannuation income, with the end result being a grossly unfair, two-tiered and complex treatment of SMSF members regarding access to the age pension. Indeed, it could mean self-sufficient SMSF members are potentially worse off than people with less savings but with refundable franking credits and part pensions.
Since 1992, when the compulsory super system was introduced, politicians of all political shades have found this growing national nest egg very tempting. But this is the first time a political party has specifically targeted one super sector for its own fiscal needs, punishing people who by dint of hard work and thrift have achieved self-sufficiency in retirement. These self-funded retirees deserve better.
John Maroney is CEO of the SMSF Association.
By John Maroney
26 April 2018