1. The ALP proposal to deny franking credit refunds
Prof Deborah Ralston
Gold Coast Retirees
16 January 2019

2. Agenda A brief history of dividend imputation
The ALP proposal to deny franking credit refunds
Who will be affected – by number and value
The Alliance for a Fairer Retirement
Adequacy, sustainability, certainty, fairness
Other issues
Being heard

3. A brief history of dividend imputation
Dividend imputation system introduced by Paul Keating in 1987 – originally no refunds if tax credits exceeded liabilities
tax review and the New Tax System White Paper of August 1998 recommended introducing franking credit refundability to:
… ensure that the imputation system operates as it should ....this would be of major benefit to low income earners, including self-funded retirees, who are unable to fully utilise imputation credits because they have insufficient taxable income to absorb them.
Endorsed by the 1999 Ralph Review of Business Taxation “so that the imputation system operates as it should” and implemented 1 July 2000
A brief history of dividend imputation

4. A brief history of dividend imputation (cont.)
In 2006 Howard government introduced tax-free retirement income
Australian equites became an increasingly popular retirements savings vehicle
70% of tax-payers over the age of 75 receive franking credits
Between and :
Franking credits $31.1bn to $47.5bn (53%)
Refunds $1.9bn to $5.9bn (210%)

5. Who received franking credit refunds in 2014-15?
Source: Treasury papers (FOI_2292_-documents_final_redacted.pdf), Document 2, released 20 July 2018,

6. The ALP policy announcement
March – the ALP revised proposal due to significant public criticism.
Direct investments by pensioners (part and full on aged, disability and other Centrelink pensions) were excluded from the no franking credit refund regime.
SMSFs were also exempt from the no refund rule if they had at least one pensioner or allowance recipient member before March  
March 13 the ALP announced a proposal to abolish the net refunding of franking credits to Australian investors other than for charities and endowments which would be exempted from the proposal. The initial proposal was expected to generate $59bn in government savings over 10 years. 

7. Individuals claiming excess franking credits
>50% have incomes less than $18,000
95% have incomes less than $65,000
Taxable income
Source: Parliament of Australia, Parliamentary Budget Office, Policy costings: dividend imputation credit refunds, 4 May 2018

8. SMSF members claiming franking credit refunds
>$1.5m balance
Source: Parliament of Australia, Parliamentary Budget Office, Policy costings: dividend imputation credit refunds, 4 May 2018

9. So who is affected? Individuals and SMSF members in pension mode
In addition:
Members of APRA regulated funds
1,963 small APRA-regulated funds with fewer than five people
50 out of 240 of the large APRA regulated funds — comprising hundreds of thousands of members
Retired small business owners who invested equity in their unlisted companies
Individuals
1,160,000
SMSF members (assuming 1.9 members per fund)
437,000
Less those receiving government benefits
-(320, ,000) = 358,000
Individuals and SMSF members affected
1,239,000

10. Alliance for a Fairer Retirement*
The Alliance for a Fairer Retirement System exists to represent millions of senior Australians, shareholders, self-funded retirees planning a sustainable retirement. Principles we believe should guide the Australian retirement system:
The Australian Shareholders’ Association; Australian Listed Investment Companies Association; National Seniors Australia; SMSF Association; Self-managed Independent Superannuation Funds Association; Stockbrokers & Financial Advisers Association; Association of Independent Retirees; Australian Investors Association; Association of Financial Advisers; WA Self-Funded Retirees Inc; and Gold Coast Retirees Inc.

11. Adequacy Sustainability Certainty Fairness
Adequacy of retirement incomes – investors may lose up to 30% income
imputation credits are equivalent to a 5%-6% increase in spending during retirement
Sustainability
Loss of income may force many self-funded retirees on to Age Pension
Revenue savings will be offset by additional expenditure
A sustainable system encourages self-reliance, rewards savers
Certainty
Planning for retirement is long term – current system has been in place 18 years
No grandfathering (in contrast to ALP policy on CGT & negative gearing)
Many will be unaware of policy until they receive less income
Fairness
People on the same income will be taxed at different rates
Investors with a marginal tax rate of zero, will pay 30% tax on dividends

12. Fairness (horizontal equity)
People on the same income will be treated differently depending on the vehicle used for retirement income, whether they are:
Pensioners or self-funded retirees
People with institutional super or SMSFs trustees
SMSFs with one age pensioner before 28 March 2018 or SMSFs with a pensioner after that date.
Investors who have insufficient tax liabilities to offset their franking credits will effectively be paying a tax rate of 30% on their investment earnings, while higher income investors will pay tax at their marginal rate.
Will lose income
Will not lose income
Self-funded retiree investors
Retiree investors receiving the age pension
SMSFs in pension mode not receiving age pension
Most members of institutional super funds in pension mode
SMSFs in pension mode receiving a benefit after 28 March 2018
SMSFs in pension mode receiving a benefit on or before 28 March 2018

13. Inquiry into the implications of removing refundable franking credits, Parliamentary Standing Committee on Economics, convened September 2018, Tim Wilson Chair 
999 Submissions received and on the official website
Hearings have been held Sydney, Melbourne & Dee Why Nov 2018 – more to come
Campaigns:
Advance Australia -
Geoff Wilson Wilson Asset Management – Petition
Defenders of Self-Funded Retirees Association  
Be heard

14. Self-funded retirees having their say!

15. Key messages from the Alliance to Parliamentary Inquiry*
The Alliance is deeply concerned not only by the negative economic impact that the proposed policy will have on more than one million Australians, but also by the psychological impact.
The Alliance is very concerned that public policy should in any way drive people onto welfare, particularly when citizens have made every effort to save for retirement and be either fully or partly self-funded in retirement.
The Alliance is also concerned by a policy proposal that actively discourages Australians from investing in Australian businesses and which will have a significant impact on capital markets and capital management within Australian companies.
* Submission 411

16. Alliance submission examples – current policy
An SMSF in pension mode with no age pension and $1m of savings invested in Australian shares.
Dividends $50,000
Franking credit cash refund $21,429
Total income $71,429
A retiree couple with no age pension, $800,000 in shares and $75,000 on deposit in the bank.
Investment income $41,500
Franking credit cash refund $17,143
Total income $58,643
A couple on the full age pension and with $300,000 invested in Australian equities in an APRA regulated pension fund.
Age pension income of $35,573
$15,000 super returns including dividends and franking credits
Total income $50,573
Compare Example 3 with Example 1. The couple who worked hard to save for retirement, and who have no age pension, but $1m in their SMSF are worse off than those who have only saved $300,000. This is clearly not fair. It is also a clear disincentive to save for retirement and will threaten the sustainability of the retirement system.

17. Alliance submission examples – ALP policy
An SMSF in pension mode with no age pension and $1m of savings invested in Australian shares.
Dividends $50,000
Franking credit cash refund $19,286
Total income $50,000
A retiree couple with no age pension, $800,000 in shares and $75,000 on deposit in the bank.
Investment income $41,500
Franking credit cash refund $15,429
Total income $41,500
A couple on the full age pension and with $300,000 invested in Australian equities in an APRA regulated pension fund.
Age pension income of $35,573
$15,000 super returns including dividends and franking credits
Total income $50,573
Compare Example 3 with Example 1. The couple who worked hard to save for retirement, and who have no age pension, but $1m in their SMSF are worse off than those who have only saved $300,000. This is clearly not fair. It is also a clear disincentive to save for retirement and will threaten the sustainability of the retirement system.

19. Other issues Will the revenue be there?
Impact on capital markets – share prices
Impact on energy prices
Impact on women
Capping
The future for dividend imputation
Other issues

20. Thank You