In light of some of the recent backlash directed at Labor’s plans to scrap refundable franking credits by both the financial services industry and the Coalition Party, in a recent release, Shadow Treasurer Chris Bowen made it clear that the Labor Party remains undeterred and does not fear a “Liberal scare campaign”.
“Across Australia, people, including many who will not be able to access refundable credits under Labor’s policy, both respect a political party that has the courage to put its policies out long before an election and also know that some of the tax concessions that favour higher wealth individuals simply can’t go on,” Mr Bowen said.
“In 2014–15, $5.9 billion was spent on refunding dividend imputation credits. The commonwealth government in the same year spent less than this on public schools at $5.2 billion. This can’t go on.”
He also disputed claims that the policy would discriminate against SMSFs in favour of industry funds.
“Put aside the fact industry funds are jointly managed by unions and employers. The fact is, industry funds are treated the same way as retail and bank funds. And all these funds pay tax,” Mr Bowen said.
“Allowing them to use franking to offset that tax is a fundamental principle of avoiding double taxation. In fact, it is tax refunds to non-taxpaying SMSFs and individuals which is the anomaly in our tax system. No other element of our personal income tax system involves refundable credits. None.”
Mr Bowen said that if the people made investment decisions solely on the basis of franking credits, the tax system is then distorting investment when it should ideally be “a non-distortionary tax system”.
“Just remember, 92 per cent of individual taxpayers are unaffected by Labor’s reforms to refundability and dividend imputation,” he said.
Ever since the policy was announced last year, Labor’s plans for imputation credits have been criticised on several fronts by the SMSF sector.
Tactical Super director Deanne Firth said that while the measure has been touted as a loophole enjoyed by the wealthy, it is set to hurt self-funded retirees in SMSFs the most.
“Retail super funds still qualify to offset their tax using imputation credits as their net tax position is positive — not due to a member by member allocation but because, pooled overall, they have a positive tax position. So, the policy is a tax on the use of a particular structure: an SMSF,” Ms Firth explained.
Other commentators have pointed out that the policy won’t actually target the rich as intended.
“It seems to me that this measure could actually allow the rich to accumulate more in super,” SuperConcepts’ Peter Burgess previously told SMSF Adviser.
“Transferring some of their pension balance to the accumulation phase may allow them to use all of their franking credits. The effect will be more retained in super for longer, as they can draw down super from accumulation phase when they need it rather than being forced to take the minimum pension each year.”
OK, so why muck up imputation? Get some reasonable tax out of super fund earnings by limiting the current pension income exemption to a tax free threshold per pensioner. This confirms my dictum on Australian tax policy as I have watched it over nearly 50 years “We proceed from anomaly, through inequity, to further anomaly and inequity.” Virtually every “tax reform” never fails to create more messes. That is why I am an abolitionist.
Subject: Franking credits – Labor’s Regressive Tax changes – the more you earn the less you lose
Have you read the recent Chris Bowen press release CUTTING FRANKING REFUNDS IS A STEP TOWARDS FAIRNESS that is available on his website.
Bowen has very cleverly crafted statements which mask the real unfairness of Labor’s plan. He labels every retiree who doesn’t get the pension as ‘rich’.
He does not address the fact that both for the individual tax payer and for the SMSF member these changes are ‘regressive’ tax measures. Those at the bottom lose a higher percentage of their annual living income. i.e. the more you earn the less you lose.
Bowen continues his claim that ‘no tax is paid’ – completely ignoring that tax was paid by the company and is added back on (grossed-up) by the individual when declaring the income;
For example under current legislation – A person receives say a $700 dividend on their shares. The shares come with a 30% tax paid (franking credit). Money received is $700 but Taxable Income declared is $1,000. When the person lodges their tax return, the dividend is ‘grossed up’. The individual declares that they have received $1,000 dividend income ($700 + $300 credit = $1,000).
Currently, the Tax Office records the $1,000 as taxable income and allows for tax paid of $300. If the person is under the Tax Free Threshold then the $300 is refunded by the Tax Office. So, by removing the refund Labor’s plan removes the retirees Tax Free Threshold hitting those at the bottom of the ‘rich list’.
Very few people in the media, even respected journalists, understand the concept of the ‘gross up’. If only people could grasp that concept they would understand the big fallacy in Chris Bowen’s argument when he says that we “can’t give refunds to shareholders who haven’t paid tax in the first place’.
Great move, I’m in. But as posted earlier, what about other self-funded retirees. They are being impacted in the same way as SMSF members. Why not include them in the party?
And why would it not be possible to arrange for the company to pay a distribution to the shareholder prior to paying the company tax? It would not be more difficult than a DRP. All it would require would be the shareholder’s TFN would it not? Then no grossing up is required.
Isn’t the ‘imagined’ $5.9b figure based on 2014 – 2015 data? Before the 2017 $1.6m cap was applied? I would have thought that Mr Bowen had sufficient integrity to at least update his expected ‘windfall’ instead of continuing to ply us with false information.
Absolutely correct, let’s see the latest figures on refunds to SMSF post 2017 $1.6 Mill pension caps.
Pure political and fact fabrication from Bowen.
Grant is right. Labor are doubling down and insisting their upcoming win will represent a mandate.
Avoiding Labor control in the senate will be key to stopping these changes going through.
i will be encouraging clients to use their senate votes wisely.
“Allowing them to use franking to offset that tax is a fundamental principle of avoiding double taxation. In fact, it is tax refunds to non-taxpaying SMSFs and individuals which is the anomaly in our tax system. No other element of our personal income tax system involves refundable credits. None.” Most of this statement is wrong, allowing union funds to access franking credits that cannot be used by SMSF’s is obviously going to disadvantage SMSF’s in favour of union funds. PHI rebate is also a refundable tax credit.
Imputation credits involve adding back the imputation on top of the net dividend received and then deducting tax. So on an individual basis no gearing up will be added to that received and therefore not have the impact Labor feels it will have!
There is absolutely no way any incoming Labor government will move on this measure and no amount of lobbying will impact them. The only way, if you ask me is to get numbers in the Senate to amend it. Watch this space.
Chris Bowen just doesn’t get it. If the policy is going to affect only 8% of the people receiving credits, the net benefit will be minimal. For him to propose such a targeted policy and then pretend it is fair or will not hurt lower income earners is ludicrous
Without comment on the accuracy of the figures, I’d just like to point out that the meaning is that 100% of the $5,9B cost of the refunding of franking credits is due to the 8% of individual taxpayers that currently receive such credits. The 92% unaffected figure relates to 92% of individual taxpayers not receiving any such credits, so they won’t be affected by the change. It does NOT mean that the change will only claw back 8% of the refunded franking credits…
ie. It is not going to affect only 8% of the people receiving credits, it is going to affect 100% of the people receiving credits… but only 8% of individual taxpayers received any such credits.
The real reason that the change won’t achieve the $5.9B ‘cost’ saving (which I’m sure Labor will have already counted as ‘received’ and spent in their budget calculations…) is that those that are most prone to be affected will be able to manage their affairs to avoid this ‘cost’. For example, as I understand it, a ‘mum and dad’ SMSF with both members entering pension phase can still utilize excess franking credits by adding one of the children to the SMSF (so the working child’s contribution tax is then offset against the franking credits).
Blind Freddie can see that this new policy decision clearly and unequivocally discrinates against SMSF’s so for Mr Bowen to say it doesn’t shows that either he doesn’t understand his own policy or is being completely
disingenuous .
If the Shadow Treasurer is a man of conviction concerning this policy, then the policy must be non-discriminatory. Where a fund, whether it is industry, retail or SMSF, has both pension and accumulation members, should not the franking credits be apportioned, so that those in pension mode (who pay no tax) have no entitlement to any credits, and those in accumulation mode have no access to excess credits flowing from pension account members. It is highly unlikely Mr Bowen and his associates will see it this way, because his mates on the industry fund boards will see this Labor proposal as a way of dragging back some of the funds they have lost over the past years to SMSFs.