Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697633299754.pdf (Australia)
Submission to The Standing Committee on Economics inquiry into the use of refundable franking credits, their benefits and the implications of their removal.
Labor’s dividend imputation policy requires transitional arrangements for self- funded retirees 1 Inquiry into the implications of removing refundable franking creditsSubmission 1044 Labor’s dividend imputation policy requires transitional arrangements for self- funded retirees Recommendation: That Labor amend the proposed dividend imputation policy to provide transitional arrangements for self-funded retirees with moderate incomes who are currently severely affected but excluded from the Pensioner guarantee amendment to the policy.
Options to address this issue are outlined in section 2 below, for consideration.

1.

Background We agree that the issue being addressed by the policy is valid and a consequence of past government policies that are no longer applicable in the current financial situation.

Through the generosity of previous governments:   Retirees over the age of 65 do not pay tax on superannuation earnings in allocated pension mode.
Full credit of dividend imputation has been refunded since 2001 instead of just being offset against tax payable.

However,  Superannuation returns are less than optimal due to large fees, brokerages, cost of financial advice and trailing commissions.

This has led to purchase of Australian shares because of dividend imputation, and been encouraged by governments, to provide an income source to supplement superannuation income as we have done.
 When super suffered from negative returns a few years ago there was limited value in   putting money into super, again leading to Australian shares as a viable option because of variable returns of super funds.

The dramatic rise of SMSFs has been driven by poor returns (Productivity Commission reports on superannuation and the Royal Commission into the finance industry).
Labor have provided a Pensioner guarantee under the proposed policy for those receiving part or full pension but it currently excludes those retirees who are self-funded and/or have a SMSF in pension mode.

There is no opportunity to offset franked income because no tax liability exits in contrast to industry and retail super funds.
Thus, the sudden imposition of this policy on self-funded retirees when previous government decisions have set up the problems leads to self-funded retirees suffering a significant hit to income.

An example, two of our friends who have done the calculations would suffer a 26% and a 30% reduction in their incomes because of the proposed policy.

It is difficult to restructure finances in a short time.
Given the next election may be in May 2019 it is not worth massive financial changes to retiree’s income arrangements on the likely chance that Labor will win the election and be able to get the legislation through parliament to implement it by July 2019 as projected.

2.

Options for consideration for self-funded retirees in pension mode A transitional arrangement be implemented both on age of retirees at the date of commencement of the policy and on gross income.
2 Inquiry into the implications of removing refundable franking creditsSubmission 1044 A.

Age    People aged 55 would have 12 years to retirement age of 67 to restructure their finances to allow for the new policy.

Those aged 65 at introduction of the policy have already set out their arrangements under current government policy and would require some time to make any transition.
Those over 67 should not have to meet the proposed policy at all given the now well-established arrangements they have made and their planning for the future with budgeting on how long their superannuation will last.

B.

Gross income  No cash credit for dividend imputation be given when the superannuation balance reaches $1.6 million.

Additional taxable income could be used to offset franking credits.
 When total gross income (not taxable income) exceeds a certain value, then cash franking credits are only applicable through a pro-rata decline in franking credits with income.

A pro-rata cut off arrangement for cash franking credits could be based on the same income and assets tests as are used for the aged pension.
 C. All citizens pay income tax  The introduction of taxation on retirees would overcome many of these issues and eliminate the difficulty of setting the various thresholds and conditions.

It would be a fairer system for all Australians.

The progressive taxation system now adopted in New Zealand has many advantages, particularly for people on low incomes.

3.

Conclusion It is the lower income self-funded retirees and those with SMSFs that are currently hardest hit by the proposed policy.
This inequity needs to be addressed before the proposed policy is implemented.

continued on next page 3 Inquiry into the implications of removing refundable franking creditsSubmission 1044 NOTES on LABOR’S PROPOSED FRANKING CREDIT CHANGES A: Current Situation for Couple with SMSF in Pension Mode Portfolio of Australian Blue Chip shares and cash of $800 000.
(Not eligible for Pension as some modest savings, a car and household contents push them above Centrelink Assets Test threshold of $819 000) Generates disposable income of $60 000 (Net of compliance costs) from Dividends Franking Credits $42 000 $18 000 (No tax payable) B: Same Couple under proposed Labor Tax Reform Disposable income now $42 000 as Govt pockets the Franking Credits.

Effectively paying tax of $18 000 C: Retired Couple Without SMSF Same portfolio and circumstances.
Income of $60 000 is taxable at marginal rate.

Two taxable incomes with total Tax Free threshold of 2 x $18 200 = $36 400 Balance of $23 600 taxable at marginal Income Tax rate of 19 cents means Tax Payable is $4484.

(This would be reduced further by Low Income Tax Rebate!)

Disposable income = $55 516 Questions: 1.

Why would you stay in superannuation if the Government changes?

2.

Should Superfund income in Pension mode be taxed in some way?

If so, at what rate?


Possibilities: a) Same as other super fund income in accumulation phase i.e.

15% (the incentive to get people to save for retirement).

In the case of our example, this is a sum of $9000 pa. b) At the ordinary marginal tax rate.

This would fit with Scenario C above.

(This would catch the big accounts having a free ride and be palatable to the lower level account holders.)

3.
3.

Under the Labor proposal as it stands, would people be driven out of super and be eligible for Aged Pension much sooner as the capital in their SMSF would be drawn down quicker, triggering eligibility for Part Pension?

4.

How can this be claimed to be ‘Budget Repair’ or ‘Tax Reform that is Fair’ given the vast difference in rates and impact on the same income?
4 Inquiry into the implications of removing refundable franking creditsSubmission 1044 Inquiry into the implications of removing refundable franking creditsSubmission 1044 The issue of a transition period needs to be addressed as raised above.

Labor is grandfathering negative gearing and for those who have already planned their retirement incomes based on government policy to be suddenly hit with this substantial cost is quite unfair.
Reference Greg Jericho (2018) Are retirees 'hit' by Labor's policy, and what is a wealthy household?

The Guardian 20 March 2018.

Available from https://www.theguardian.com/business/grogonomics/2018/mar/20/are-retirees-hit-by-labors- policy-and-what-is-a-wealthy-household 6 Inquiry into the implications of removing refundable franking creditsSubmission 1044