Angry retirees have been lashing out for months at Labor’s proposal to axe cash refunds for excess franking credits, and now the country’s accountants have also come out against the policy, saying it will discourage Aussies from saving to support themselves in retirement.
Labor leader Bill Shorten has vowed to get rid of refunds on franking credits if he finds himself in The Lodge after the next general election – a policy that the Coalition deeply opposes.
In September, following his appointment as treasurer, Josh Frydenberg ordered the Standing Committee on Economics to look into the implications of removing refundable franking credits, inviting members of the public to submit their concerns in writing.
In his written submission to the committee, Peter Davie, who has a self-managed super fund, called the proposed policy discriminatory.
“I have received refunds of franking credits from dividends for many years,” he wrote. “Due to being self employed, I have not been able to make contributions to my superannuation for a few years now and the tax refunds have increased the return on my investments in the absence of any contributions.
“I don’t understand why discrimination about the source of tax refunds is occurring. Surely it’s very simple, if you have paid more tax than is assessable, it should be refunded, unless this is the thin edge of the wedge and all tax refunds will eventually be phased out. This change is solely designed to discriminate against investors in the share market, regardless of the vehicle.”
Ruth Idina Gates, a self-funded retiree, told the committee that she may be forced to sell her home if franking credits refunds are axed.
“Having saved for my retirement & NOT obtaining any benefits from the Public Pension through Centrelink am extremely nervous as to how I shall be able to live in my own unit should franking credits be withdrawn from my investments in my SFSF,” she wrote.
In its own submission to the committee, CPA, Australia’s professional accounting body, described the proposal as a “highly iniquitous and punitive” one that would create a “two-class system of ‘haves and have-nots’.”
“CPA Australia believes that such a move will not only damage people’s opportunity to – but also further discourage them from – saving for their own retirements,” CPA’s submission said.
Instead, the accountancy body suggested a $10,000-$20,000 annual cap on refundable credits, explaining that “such a measure may deliver a less inequitable and overall better policy outcome – although it would still not have unanimous community support”.
Franking credits, also known as imputation credits, were introduced to prevent the double-taxation of company earnings, by allowing companies to effectively pass on a proportion of the tax paid on its profits to shareholders in the form of a ‘franked’ dividend. The franking credit then allows the shareholder to reduce the income tax they would’ve otherwise paid on the dividend income or, in the case of shareholders who aren’t liable to pay tax, receive a refund of the value of the credit from the Australian Taxation Office.
These refunds are used by some retirees as a retirement income stream, but Shorten has argued that they’re unfairly beneficial for wealthier Australians. According to an analysis of Shorten’s proposal by the independent Parliamentary Budget Office this week, 53 per cent of all excess franking credits claimed by self-managed super funds between 2014-15 were to funds with more than $2.4 million in assets.
But the policy drew outcry when it was originally floated by Shorten in March, and the Labor leader wound back his initial proposal to provide exemptions for about 270,000 pensioners, along with people in receipt of other welfare payments, from the changes.
Paul Drum, the CPA’s general manager for external affairs and policy and advocacy, told Starts at 60 on Friday the fact Labor had already shifted somewhat in its policy proposal indicated that there may be more room to make changes by, for example, introducing the $20,000 cap.
“The proposals of the initial policy had already demonstrated their flexibility and ability to change the policy if circumstances warranted it, by taking out Age Pensioners for example from the initial policy announcement,” he said. “So our point was, in the same spirit of getting appropriate policy in this regard, if they continued down this track, they should look at other measures, such as an annual cap.”
Drum said an annual cap would benefit many people who rely on franking credits, particularly lower-income households.
Accountants aren’t the only financial professionals concerned by the policy. Investment adviser Nicky Younger wrote in a submission to the standing committee that the policy was “unfair to self-funded retirees who have worked hard to accumulate assets to fund them in retirement”.
“The removal of this extra funding is not good for our elderly or our encouragement for people to self-fund in retirement,” Younger said.
However, the Grattan Institute has backed Labor’s proposal, despite it being “far from perfect”, because it will improve the country’s budget.
“Federal Labor’s plan to remove refunds for excess franking credits is a fair way to help improve the budget and wind back the growing intergenerational transfers in our tax system,” the thinktank’s Danielle Wood and Brendan Coates said.
However, the institute said there could be better ways of achieving the same goal, adding: “More substantial reforms – such as taxing superannuation earnings in the pension phase at 15 per cent (super distributions would remain tax free) and winding back the seniors and pensioners tax offset – would achieve the same benefits but without some of the investment-distorting effects of Labor’s policy”.