The Australian Labor Party’s proposal to remove franking credit refunds is part of a suite of projected $55 billion savings earmarked for important services and infrastructure projects. The underpinning philosophy is that these savings will be provided by Australia’s wealthiest people who won’t miss it.
But is that really the case?
The SuperConcepts technical team has done a detailed analysis and projection of the pension incomes hit hardest by Labor’s proposed policy.
Retirees with an account-based pension receiving a minimum pension amount of $45,000 per annum at age 65 will find themselves 15 per cent worse off in retirement savings after 20 years.
This is hardly the high-net-worth individuals that an aspiring Labor government suggested were the primary target of the projected government revenue.
Naturally, this concerned us at SuperConcepts, and the data we revealed formed a crucial pillar in our submission to the inquiry on the issue with the standing committee on economics.
Our analysis looked at the impact of removing refundable franking credits over 20 years on the superannuation balance of a member who at age 65 had an SMSF balance equivalent to the average SMSF balance for a member of that age (i.e. $900,000).
The calculations assume a 40 per cent allocation to Australian shares, 3 per cent capital growth and a 4 per cent income return. The calculations also assume the SMSF has a single member who only has a retirement phase interest in the fund and is receiving the minimum annual pension entitlement from an account-based pension.
Closing balance after 20 years with refundable franking credit: $953,480
Closing balance after 20 years without refundable franking credit: $825,519
That’s a significant impact on the fund’s earning rate and the total income received each year.
Breaking it down on an annual basis helps put the household budget in perspective.
Year one total income with franking credits: $36,771
Year one total income without franking credits: $30,600
That’s the cost of running a car and a modest annual holiday.
From there it gets worse. After five years, the income differential is $7,631 per annum, and after 10 years, the differential is $9,207 per annum.
The effect on the annual pension entitlement is just as worrying. After 10 years, the SMSF member’s minimum annual pension entitlement would be reduced from $60,756 to $56,762.
After 20 years, from $88,298 to $76,991.
This is due to the retirement phase benefit being replenished at a lower rate as pension payments are made, resulting in a quicker depletion of their superannuation assets.
Sure, trustees could increase their pension payments above the annual minimum requirement, but this would accelerate the depletion of their capital and increase their dependency on the age pension at an earlier age.
The introduction of the superannuation reforms on 1 July 2017 means that SMSF members with substantial balances are less likely to be impacted by the removal of refundable franking credits.
The $1.6 million transfer balance cap introduced on 1 July 2017 effectively limits the amount of franking credits which are refundable under the current regime.
SMSF members, who before 1 July 2017 had pension balances in excess of $1.6 million, were required to withdraw any excess pension balance above $1.6 million or transfer the excess balance to an accumulation interest in the fund.
As investment earnings from assets supporting an accumulation interest are taxable, the existence of an accumulation interest results in the fund having some taxable income to use its franking credits rather than those credits being refunded, which may have been the case prior to the 2017-18 income year.
This is an important point because it means SMSF members with a total superannuation balance in excess of the general transfer balance cap (currently $1.6 million) may not be impacted, or the impact from removing refundable franking credits will be much less than first anticipated.
In other words, the projected budget savings of $55 billion over 10 years is unlikely to be realized. And much of the revenue that will be raised will come from the superannuation accounts of members with much smaller superannuation balances. Surely, that’s not the intention of the workers party.
If this policy is well-intentioned, the execution is misguided. A rethink in conjunction with the SMSF sector is in order to get the balance right. That, or a total abandonment of a muddled policy that hits the lower end of retirees.
By Natasha Fenech, chief executive, SuperConcepts
For those with tax free account based pensions, it really doesn’t matter whether it’s grossed up or not. Makes no difference to the tax position.
We hate SMSF is the Labor motto and we want everyone paying our Unions fees via Industry Super.
Pure politics at it’s worst and dressed up to look like real budget repair.
Given Labor are purposely using pre $1.6 million Pension Cap Franking data – it is nothing but a lie the intended savings. But if they stop money leaving Industry Super to SMSF = Win for Labor.
And also kill off LRBA = Win for Labor and Industry Funds as people wont set up SMSF to gear into property.
Totally agree to your comment
Every ONE who gets Imputed Credit be included in Labour policy.
Better, Simpler, Smarter and Fairer Proposal would be for ATO for Labour to Retain Percentage of ALL Imputed Credits before passing on to Taxpayer.
Labor know exactly what they are doing.
Their policy is not based on logic or fairness – it’s about political point scoring.
They also want to drive people out of SMSFs and in to industry funds.
The mooted tax savings will never eventuate at the projected levels as the Parliamentary Budget Office has severely unestimated the amount to which impacted SMSF trustees will adjust their investment strategies to maintain their income.
Correct, an ex-Labor staffer was attempting to out this but was mooted by their legal division. Why has publications like these not brought that information to light?
I had a talk with Treasury on similar issues. They do not understand that if they let the middle class have enough money that the middle class will not become a burden on Centrelink, thereby saving the Government expenses of pension payments. Remember that over 50% of all tax collected goes to Centrelink, any such savings could be beneficial to us as a nation.
If an ALP Government is elected, then at the least their proposed changes should be grandfathered. I haven’t heard anything in this regard so far.
Listen to the rhetoric. ‘$55 Billion savings’. That’s not ‘savings’, that’s literally stealing less!
The policy could be made very simple – no franking credit entitlement at all if the total member’s balance is over $1.6M (ie tie it in with the current threshold). But a cynic would suggest that is too simple to administer (and wouldn’t get past the wealthy powerbrokers who set such things because then they would actually start losing more than the less well off).
Don’t agree with this. Simply because someone has managed to save more in an area that makes the most financial sense (Super) then they are punished more than say someone who has accumulated even more in other entities or their own names individually? Still would be an unfair tax attribution for one segment of society.
A member with $900,000 probably has a spouse with a similar balance if correct planning has taken place and is also likely to own the family home. Not a bad position to be in at age 65. Maybe not high net worth according to the definition of some but definitely not on struggle street. Maybe businesses in the accounting industry should leave politics to the politicians and instead aim to keep local jobs in Australia rather than offshoring them so that all people in this country have the chance to work and put money aside for their retirement via super.
Your obviously not affected but your brain is. A one off assumption and its wrong. There are many other scenarios.
Well said Fred, hate ignorant comments like SS in forums where they obv have no place even reading or being here.
Great analysis. I don’t think the Labor govt realizes how many people will be effected by not refunding the unused credits. A lot of pensioners, both aged and self funded rely on the excess credits refunded to live on. Whether it be for a holiday or to help with living costs. The Labor govt has got it wrong and we need to make an issue of it.
They realise, they just don’t care. This is a political message in the lead up to the election for the mindless masses that Labor are ‘taking unfair refunds from the rich’ to sway them over, pure and simple. On the back of the Royal Comm where they can also vilify banks, financial planners and now SMSF accountants, anyone who deals in this space will be affected. Do not be lax when talking to your clients about the wrongness of this proposal and if they prefer their current lifestyle to not vote Labor, otherwise we all will get the Gov and rules that our slack apathy deserves.
Ii think that the issue of grossing up the cash received then reducing the credit has also been lost on translation as are we still to gross up our dividend received or not?