Industry Super: Labor’s franking reform is equitable

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By Leith van Onselen

Industry Super Australia’s Matt Linden says Labor’s revised policy on cash refunds for excess dividend imputation credits is fairer and will primarily affect the wealthiest households. An analysis of the policy on behalf of ISA suggests that nearly 86% of the loss of imputation credits will be borne by the wealthiest 10% of Australians. From The AFR:

Changes to Labor’s plan to deny refunds for excess franking credits will result in almost 86 per cent of the losses being confined to the nation’s wealthiest 10 per cent, new analysis shows.

The analysis, conducted for Industry Super Australia by Phil Gallagher, Treasury’s former director of the Retirement Income Modelling Taskforce, shows the average loss in this decile is $2793 a year…

The Industry Super research said that under the policy as originally proposed by Labor two weeks ago, 80 per cent of the lost imputation credits came from the top two deciles, or top 20 per cent. Under the changes announced on Tuesday, 95 per cent of the losses will be borne by the top 20 per cent.

“The revised policy is fairer and effectively quarantines the impact of the proposed changes to the wealthiest households,” said ISA spokesman Matt LInden...

“Like the unsustainable super tax concessions which the Turnbull government reined in – and Industry super funds backed – this proposed policy is fair and coupled with complementary measures should be supported.”

Labor’s changes to the policy will remove one-quarter of the original 1.2 million people who were to be hit, while retaining 94 per cent of the revenue.

This is similar to the Grattan Institute’s analysis, which showed that the wealthiest 20% of retirees own 86% of the shares:

And showed that Australia’s superannuation and tax system remains absurdly generous to older Australians, with older Australians paying less in tax today than they did 20 years ago, despite higher workforce participation and incomes, with the proportion of seniors paying tax almost halving in 20 years, from 27% in 1995 to 16% in 2014:

The fact of the matter is that Peter Costello should never have changed the dividend imputation rules in 2000 to allow the conversion of franking credits into cash refunds for shareholders.

Given the initial goal of dividend imputation was to avoid double taxation – i.e. ensuring that tax gets paid on company profits, but not twice over when paid out as dividends – then it made no sense to allow retirees paying zero or minimal tax on their superannuation earnings to then also receive cash refunds for their franking credits. Such a situation is not only inequitable and effectively a subsidy to the (mostly) rich, but the cost to the Budget (circa $6 billion) is simply too high to be ignored.

Now Labor finds itself in the difficult position of trying to overturn yet another piece of Costello budget vandalism, with beneficiaries of this largesse crying foul. They deserve support on this particular issue.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.