The real “victims” of Labor’s franking credit reforms are wealthiest retirees

By Leith van Onselen

Last week, a Coalition-led parliamentary inquiry into Labor’s dividend imputation policy began public hearings, which heard a conga-line of vested interests bemoan that Labor’s proposed reforms are “unfair” and would smash “ordinary Australians” and “lower-end retirees”.

However, this special pleading has already been debunked by the Parliamentary Budget Office (PBO), which released analysis last week showing why Labor’s dividend imputation policy is targeted at wealthy retirees.

First, the distribution, by fund balance, of excess franking credits claimed by self‑managed superannuation funds (SMSFs) is overwhelming skewed towards the wealthy:

Second, around 86% of shares were held by the top two wealth deciles in 2015-16:

According to a recent FOI, the Australian Treasury warned of the ballooning cost of Australia’s dividend imputation system before Labor announced a $55 billion plan to clawback tax refunds from 1 million retirees:

Most of which has gone to SMSFs:

Of which most SMSF owners tend to be higher income earners:

Back in March, Industry Super Australia’s (ISA) Matt Linden claimed that Labor’s revised policy on cash refunds for excess dividend imputation credits was fair and would primarily affect the wealthiest households, with 86% of the loss of imputation credits to be borne by the wealthiest 10% of Australians.

This ISA’s findings were 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 multi-billion dollar cost to the Budget is simply too big 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. Labor deserve support on this particular issue.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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