Labor's Franking Policy Ignores Behavioural Response

SMSF Association chair Deborah Ralston: "I have concerns the tax revenue projections the ALP has done may not stand up.'' Ryan Stuart

Labor's franking credit policy will raise $550 million a year less than what Bill Shorten anticipates because of changes in investor behaviour, claims an alliance of shareholders, seniors and self-managed retirees.

The grand alliance, which includes the Australian Shareholders' Association, National Seniors Australia and SMSF Association, cites new Rice Warner analysis that suggests revenue gains will be weaker than the $10.7 billion that Labor expects in the first two years.

"There is going to be a strong behavioural response so I have concerns the tax revenue projections the ALP has done may not stand up," said alliance spokeswoman Deborah Ralston, who is chair of the SMSF Association, a non-executive director with Mortgage Choice and a professorial fellow at Monash University.

If it wins the next election, Labor will make franking credits non-refundable for all shareholders other than those receiving a part or full age pension. Self-managed superannuation funds will be hardest hit by the change.

Labor's franking policy is the catalyst for the formation of the Alliance for a Fairer Retirement System, but its broader objective is to improve retirement income policy.

Members insist the revenue Labor does raise by denying refunds will hurt people on modest incomes most, not the rich, and that is why the policy should be reconsidered.

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 will end those refunds, a blow to anyone on a tax rate of less than 30 per cent.

On advice from the Parliamentary Budget Office, Labor expects to raise an additional $10.7 billion in its first two years and $55.7 billion over a decade.

But Rice Warner says the revenue gain is overestimated by about $550 million a year, mostly because investors will move their money out of SMFS and into funds that are still able to make use of franking credits.

The firm predicts SMSFs will shed about 25 per cent of their Australian equity holdings and, of that, about 5 per cent will be purchased by foreigners, and will have no effect on revenue.

But the rest will be sold to APRA-regulated super funds still able to use the credits, amounting to $550 million in "predicted annual loss".

"We think it's very unfair because instead of people paying tax on their investment income at their marginal rate, those on very low incomes will be paying at the corporate rate of 30 per cent," Professor Ralston said. "That's not right."

Labor's "pensioner guarantee" will shelter those receiving the government-funded age pension. It also exempts SMSFs with at least one member receiving the pension before March 28, 2018.

"The exemption for age pensioners makes it more complex," Professor Ralston said.

"So in terms of the good principles of taxation, which are about equity and simplicity, both of those things are really infringed with this."

Prime Minister Malcolm Turnbull has accused Labor of a "tax attack" on grannies that would "overwhelmingly be borne by people on lower incomes".

Mr Shorten has said tough choices need to be made so that the country can pay down debt and improve services such as health and education.

By Joanna Mather

Financial Review

16 May 2018

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