With about 1.4 million older people set to be directly hit by the ALP’s franking credit savagery, the word is starting spread among Australian families: “Vote for the Coalition or children and grand children may have to support elderly parents or grand parents”.
My guess is that with their families there will be at least 3 million voters who potentially can swing the election once they understand what the ALP proposes to do to them.
Commentators like me have been writing for some time that the ALP attack is not on the rich but rather on older battlers trying to self-fund their retirement.
But now we have the actual data and the number being savaged is much larger than I expected. And given my knowledge of what is actually taking place in the investment industry, I am totally confident the vast majority of rich retirees are not among the 1.4 million people.
The ALP claim that it will raise $55 billion over 10 years mainly from large self-managed funds is total fiction. For those unfamiliar with franking credits let me briefly explain what is happening.
Australian companies that pay a 30 per cent tax on their profits distribute part of those profits via dividends. When he was treasurer Paul Keating saw that it was unfair that Australians should pay an effective double tax on their dividends and declared that in their returns they should get a credit for the 30 per cent tax already paid by the companies.
If you are in a low tax bracket or have no taxable income then, of course, you receive your entitlement via a cash payment (called a franking credit) and it’s equal to 30 per cent tax that has been paid.
Shadow treasurer Chris Bowen is happy for people to receive these “franking credits” if they are paying tax so there is an offset. But he plans to abolish cash credits that people receive when they have insufficient offsets. However, under the ALP plan if you support an industry or retail fund you can retain your franking cash credits.
Thanks to the Self-Managed Superannuation Fund Association (and its chairman Deborah Ralston) as part of the Alliance for Fairer Retirement system, we can now document who the ALP is really targeting and the numbers involved in each blow. Clearly the SMSFA are a biased source, but their research is based in the ATO figures for 2014-15.
And to bring home to the many honest ALP politicians and candidates (including Chris Bowen who I don’t believe understood the impact of his plan) what they are doing to lower income Australians, let me relate a true story that is typical of the 840,000 people in the community who are not in superannuation and not on the government pension but face the ALP firing squad because they receive franking credits in cash.
This person is an Italian migrant who came here many decades ago and who now needs weekly medical attention. He never trusted superannuation and saved in his own name and is now proud that he does not rely on a government pension. He survived the low interest rates by investing in large companies with fully franked dividends. The ALP proposes to take between $10,000 and $15,000 out of his pocket. It will shorten his life. His advisers suggest a government pension, but he is very proud.
When you first look at the 2014-15 ATO figures you can see why the ALP was so excited. In all $5.9bn in franking credits was paid in cash. Then you go deeper and discover that the $5.9bn was divided four ways: $2.3bn went to individuals, $2.6bn went to self- managed super funds, $300 million to other super funds and $700m to tax-exempt entities. I will analyse each of those segments and show how the rich escape but the battlers get hit. I will also add two hidden ALP targets where there is less detail.
● The $2.3bn franking credit cash payments are claimed by 1.16 million individuals outside superannuation. There are 1.16 million people in this category but in fact the ALP later exempted 320,000 because they were also on the government pension, leaving 840,000 in the firing line.
More than half of the 1.16 million individuals initially impacted had taxable incomes below the $18,201 tax-free threshold, and 96 per cent had taxable incomes of less than $87,000.
Accepting that the total figures are skewed by those on the government pensions, clearly there are relatively few fat cats among them and those that are rich are already changing their investment portfolios. The vast majority of the 840,000 people to be hit are battlers like my above example. They don’t deserve it.
● The $2.6bn franking credit cash payments are claimed by SMSFs; in all 420,000 people are involved. But out of the $2.6bn, $1.3bn went to 33,761 self-managed funds in pension mode, having assets of more than $2,443,843. Another $468m went to around 30,000 funds that have assets of between $1.5m and $2.44m.
So these are the rich retirees that Bill Shorten and Chris Bowen wanted to attack and they took around $1.8bn or close to 70 per cent of the $2.6bn franking credit cash payments received by SMSFs. Sorry Bill, sorry Chris, most of that money is already gone. The tax-free superannuation status of a retiree now only applies to amounts below $1.6m. Earnings on higher amounts are taxed at 15 per cent. Around the investment industry, people in that situation are now organising their portfolios so that their franking credits will be offset against taxation by June 30, 2019. In 2014-15 all pension mode income was tax- free so there were large individual franking credit cash payments but few will be left by 2019-18. The remaining $800m will be spread among about 356,000 people.
●The $300m claimed by “other funds”: This is a real trap. Most of these funds are small corporate funds that have a large portion of retirees in pension mode. Most will have no idea their franking credits are about to be slaughtered. All members of corporate funds that are dominated by retirees in pension mode will need to switch their membership to bigger funds. We do not know the number of people affected but the SMSFA says it could be hundreds of thousands.
● $700m to tax-exempt entities: this is dominated by the Future Fund, which I believe has been exempted.
So from the above we have around 1.3 million people affected.
All around the country there are hundreds of thousands of small mum and dad corporate enterprises that faithfully paid their corporate taxation, storing up the franking credits they generated for their retirement.
The plan was they would sell their business or transfer it to members of their family and pay themselves fully franked dividends. They have no other income so the franking credits come via cash payments. Those who have done this in the past are in our first category. I assume there about 100,000 people now looking to pay out their franking credits to fund their retirement. These are people who did the right thing all their lives, yet despite this they have been lined up to be shot at dawn by the ALP policy.
And guess who will take the cream? None other than the ALP’s mates — the union-employer controlled industry funds (big retail funds will enjoy a similar benefit but people are exiting these funds after the mauling they received at the royal commission).
How does this work? The industry funds have a worthwhile portion of the members who are in pension mode and therefore enjoy tax-free revenue but the amounts they have invested are swamped by those not in pension mode. Therefore, as a totality, the industry funds pay taxation sums that are much greater than their franking credits.
Those in pension mode receive a “refund” which comprises their tax-free status plus their share of the fund’s franking credits. It is all lumped together in the one refund and those retirees in pension mode never see their franking credits. I can’t think of anything more outrageous.
Retirees with exactly the same amounts of money and entitled to exactly the same amounts of franking credits are treated totally differently. Those who have their money with ALP mates get franking credits and those that don’t use the services of the mates get no franking credits. These mafia-style activities are not yet understood by voters and or by non-mafia ALP candidates. When they learn, they will just as horrified as me.
And there is one other mafia- style attack on our retirees. People in self-managed funds who registered for a government pension on March 28, 2018 are also allowed to retain their franking credits. But those who register for a government pension after March 28 are sent to the firing squad unless they support the ALP mates in industry funds.
It is surely part of a fair society that whatever way you save for retirement — whether it be by saving via superannuation, outside super, or via a small business’s franking credits, you should be treated the same. And that’s the way we currently structured our society, but the mafia want to change it so that only those who support their mates get the money.
Footnote: None of the above is a criticism of the industry funds. They deserve their current market dominating position. They don’t need mafia money and would much prefer to attract their money fair and square, which is what they are doing now.
By Robert Gottliebsen (Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the Australian Media Hall of Fame and in 2018 was awarded a Lifetime achievement award by the Melbourne Press Club. He received an order of Australia Medal in 2018 for services to journalism and educational governance. He is a regular commentator for The Australian.)
29 September 2018