Via the ABC:
It has been over a year since Labor announced its policy to scrap franking credit cash refunds, but anger towards the proposal in some quarters remains white hot.
“The franking credit proposal is the most unfair proposal and hostile proposal I’ve ever heard of or seen in my life,” Perth retiree Steve Gledhill told 7.30.
“It targets entirely the wrong people. It sends entirely the wrong message and it’s going to make life very difficult for a lot of people in the wrong category, when they should be enjoying life and should be left alone to do so.”
Mr Gledhill, 71, has been retired for 10 years. His wife Julie, 61, is still working in an aged care facility.
Mr Gledhill said he has about $500,000 in his self-managed superannuation fund (SMSF) and earnings from that investment give him an income of between $40,000 and $50,000 a year, which includes the amount he receives back in franking credit refunds.
He estimates his income will drop about 30 per cent if the Labor Party wins the election and gets its policy changes through.
“To lose $15,000 a year will hurt and hurt seriously,” he said.
On April 13, surrounded by the party faithful in Burwood, Opposition Leader Bill Shorten railed once again against franking credit refunds.
“If you are getting a tax credit when you haven’t paid any income tax, this is a gift. It is a gift. It is not immoral, nor is it illegal, but it is a gift,” he said.
The Labor Party says it will outspend the Coalition on health and education. In order to pay for those promises and protect the budget position, it needs more revenue.
Mr Shorten said he is banking on saving a lot of money by scrapping franking credit tax refunds.
“It is a gift that is eating our budget. It is now costing our nation over $6 billion a year, and pretty soon it will cost $8 billion.”
Prime Minister Scott Morrison said Labor should not restore the budget off the back of retirees.
“You’ll have a Labor government that is going to steal the money from thousands of retirees by taking away their franked dividend credits,” he said.
After 7.30’s last story on franking credits, the TV program was inundated with emails from viewers like Mr Gledhill.
Some viewers were angry because they believed Labor’s policy would unfairly target self-managed super funds and would not hurt industry (or as some termed them, “union-backed”) super funds.
It is worth noting that industry super funds have directors from both unions and employer groups.
Retirees are unable to make voluntary super contributions after they turn 75, so they cannot top up their super, but they are able to rollover their super to a different fund at any age.
What the proposed changes would mean for super funds
Franking credits represent the amount of tax a company has already paid from its profits.
When an Australian shareholder receives their dividend from a shareholding and it is “franked”, they receive a tax credit for the tax already paid by the company on that income — thereby ensuring that the same income is not “taxed twice”.
At the moment it does not matter whether the super fund you are in — a large industry and retail superannuation fund, or your own personal SMSF — is a net taxpayer or not. Under Labor’s policy, however, that distinction becomes a vital one.
Under the present rules, if a SMSF owns those shares and all its members are retired (a SMSF can have up to four members, where each is a trustee) and not paying tax, those retirees receive that tax credit as a cash refund. Labor’s policy would stop this.
Industry and retail superannuation funds pool their members’ money to invest. They usually also have members in pension mode who are not paying tax, but they also have members who are still working and are paying tax on both their contributions to the fund and their earnings.
So most larger funds are net tax payers.
When a large super fund receives franking credits on its investments, under Labor’s new policy it will be able to use them to reduce the tax that it would otherwise have to pay.
“It’s one of the beauties of the system,” said Eva Scheerlinck, from the Australian Institute of Superannuation Trustees, which represents the not-for-profit super sector.
“It’s a pooled system. The contributions that go into the super fund, they’re able to invest that money as if there were large conglomerates, if you like, and have the benefit of being able to invest large amounts of money together.”
Shadow Treasurer Chris Bowen said Labor’s policy has not been designed to hurt SMSF’s or advantage larger funds.
“This is a policy designed to stop tax refunds and tax cheques being sent to people or superannuation funds that have not paid income tax. That’s the fundamental principle,” he said.
Losing sleep over franking credits
Retired carpenter Chris Phillips, 83, expects Labor’s proposed changes will cause his living standards to take a big hit. He said franking credit refunds make up around $9,000 of his $36,000 a year income, and the worry is impacting his health.
“I never got any sleep at all last night thinking about the money that I’m going to lose,” he said.
Danielle Wood, a fellow at the public policy think tank the Grattan Institute, said younger workers are getting a dud deal with the tax scales weighted in favour of older people.
“I actually have sympathy for older Australians that are going to be affected by this proposal,” she said.
“People save for their retirement, they expect a certain set of policies, but policies do change and policies change for everyone. People will have to change their behaviour in order to deal with this.
But retiree Mr Phillips does not believe younger workers are being hard done by.
“I think they seem to forget that they’ve never seen a recession, they’ve never really seen austere times. They spend money like water and go into debt. Whereas when I was brought up, I was lucky to get a second-hand bike,” he said.
Mr Phillips said he too might close his SMSF if Labor gets elected, and depending on the makeup of the Senate.
“I think a lot of people will go over to the industry funds. And I’m thinking about it myself. But I’m waiting until after the election to see if Bill Shorten gets in, which he probably will do. And if the legislation has to go through the Upper House.”
Ms Wood doesn’t think Labor is trying to push retirees into industry funds.
“I don’t think this is a conspiracy in order to benefit industry funds,” she said.
‘We can no longer be the only country that does this’
If a large cohort of retirees did wind up their SMSFs and move their savings into industry or retail funds, it could blow a massive hole in Labor’s projected budget savings.
But Ms Wood does not think that will play out.
“The Parliamentary Budget Office estimates that it will save almost $60 billion over 10 years,” she said.
“There’s a lot of uncertainty around that estimate but I think they’ve been conservative in their assumptions.”
Mr Bowen said he is not worried if people choose to change their superannuation fund.
“We can no longer be the only country in the world that does this. This costs more than what the federal government spends on public schools, three times what we spend on the Australian Federal police. It can’t go on.”
What really determines whether or not Mr Gledhill is a parasite or victim here is not the boat. The more pertinent question is does he own a house as well? If so, then he is wealthy and much of that wealth is untaxable, as well as outside the pension assets test. In that context, his boat is nothing more than a tax-payer subsidised rort.
But if he lives on the boat, and does not own a house, then he’s not much better off than the denizen of a floating caravan park and can hardly be considered rich.
That does not make the original franking credits policy a good idea. It’s not and it should go. But neither should Mr Gledhill be subjected to national abuse, because he is the victim of a political risk that was embedded in the retirement system by the king of such temporary giveaways, Australia’s worst ever Treasurer, Peter Costello.
Is Mr Gledhill struggling aboard the SS Fuckwit?
