Labor leader Bill Shorten wants to get rid of the franking credit cash refunds given to people who pay no tax – and many retirees are furious.
It may sound like a complex financial discussion of no interest to the everyday person, but in fact many retirees on part-pensions are thought to among the one million people expected to be impacted by Shorten’s proposal.
Under the system that’s existed for the past 30 years, companies that pay Australia’s 30 per cent company tax are given credits by the government for that tax, which they pass on to shareholders as an imputation or franking credit on dividends. The system was designed to prevent the double-taxation of company dividends, because the company has already paid 30 per cent on its income to the taxman.
Shareholders who pay tax can use the credits to offset tax they may owe on other income, but shareholders who don’t pay tax – such as pensioners and self-funded retirees who live off their super income – are able to obtain a cash refund on the credits. That ability to get a refund was introduce in 2000 in order to encourage Aussies to invest in Australian company shares.
Labor argues that the refund system unfairly benefits rich investors who get up to $2.5 million in cash from the government in the form of refunds, while paying no tax. Unveiling the plan yesterday, Shorten said he wanted to close down “unaffordable tax concessions to pay for schools, hospitals and lower taxes for working Australians”. According to reports, the credits are currently costing the government about $6 billion a year and could rise to $8 billion – money that Opposition Treasury Secretary Chris Bowen said was more than the federal government spent on public schools and childcare.
“We can’t afford to pay out $8 billion of taxpayers’ money to people who pay no income tax,” Shorten said. Labor has insisted that those impacted by the abolition of franking credit refunds won’t be paying any more tax.
But experts, including former treasurer Peter Costello, who designed the refund system, have blasted the proposal as a tax grab on pensioners and superannuation savers.
The Australian cited Treasury analysis of Labour’s plan that reportedly shows the biggest group of people hit by the change will be those receiving incomes of less than $18,200 a year, most of whom receive the Age Pension. According to the analysis viewed by the newspaper, more than 610,000 people will lose an average of $1,200 a year if franking credit refunds are abolished, while just 5,000 people on incomes of more than $180,000 will be affected.
“This will affect millions of retirees, age pensioners and part-pensioners,” Costello told The Australian. “This is a tax rise for them.”
The analysis is backed by financial experts such as consultancy Rice Warner, which specialises in pensions and superannuation information. “Investors with high taxable incomes benefit from a reduction in their tax bills and they will continue to do so after the changes,” Rice Warner said in a report released today. ” The main groups affected would be retirees on modest incomes holding equities directly, and many SMSFs which have assets predominantly in pension accounts.”
The consultancy went on to warn that “hundreds of thousands of Australian retirees who hold small parcels of shares from privatisations, particularly CBA and Telstra” would be particularly impacted.
John Maroney, the CEO of the Self Managed Super Funds Association, said in a statement that many self-funded retirees had planned their retirements around the existence of the refunds.
“This proposal will affect more than one million Australians saving for their retirement and other purposes. Our calculations show it will cut about $5,000 of income from the median SMSF retiree earning about $50,000 a year in pension income. To be saying these people won’t be paying any more tax is just semantics,” he said.
“This hit on retirement incomes clearly is not just affecting the very wealthy and can substantially damage the lifestyles of retirees who have prudently saved and are carefully drawing down on their retirement savings. Viewing all SMSFs as belonging to the mega-rich is an over simplification.”