Labor’s plan to disallow excess franking credits to Australian shareholders with low taxable incomes is flawed on a number of levels. One implication of the policy that hasn’t been closely examined yet is the potentially greater impact on women as they tend to live longer and have a greater need for security of income in retirement, especially those who have little or no superannuation to fall back on.
Older Australians are over-represented when it comes to direct share ownership. According to Treasury data, more than half of the 1.1 million people who received franking credit refunds in 2014/15 were over 65. That is around 16 per cent of the 3.6 million Australian residents in that age group.
Around one-third of individuals who receive franking credit refunds will get the pensioners’ exemption to ensure no loss of income, but self-funded retirees who don’t get the age pension will not. Many of these also don’t have much super.
Older Australians have often not benefited from the superannuation system. Compulsory super was only introduced in 1992, at a low level of 3 per cent to start with and, of course, it has never applied to the self-employed or those earning less than $450 a month. As a consequence, those retiring now still have fairly modest average balances and indeed data from the Australian Bureau of Statistics 2015/16 “Household Income and Wealth Survey” shows 51 per cent of men and 63 per cent of women over the age of 65 have no super.
Women tend to have lower balances, given lower average salaries, a tendency for casual employment, periods out of the workforce and the fact they live longer. They are also more likely to have an involuntary retirement prior to 65, given the need to care for older partners or other family members.
Those who do have some super will not be so badly off. The extent to which those with institutional super accounts will be affected is open to debate. Treasury figures suggest 3.5 million member accounts in Australian Prudential Regulation Authority-regulated super funds will feel some impact, but the extent of that is unclear.
Those who saved for retirement through an SMSF, however, will lack the tax liabilities to offset their franking credits and will therefore lose income. Around 437,000 SMSF members in pension mode received franking credit refunds in 2014/15. Just on 30 per cent of SMSF members over 65 are women.
It appears the intentions of the ALP policy to contain the costs of the dividend imputation system, to improve government revenue and to impose some kind of wealth tax are well intended from a fiscal perspective.
However, the policy will impact very differently on people on the same income, depending on whether they are a self-funded retiree, an age pensioner, a large super fund member or an SMSF member. If you were an SMSF member with an age pension on 28 March 2018, you would also be in a different position to one who commenced their age pension on 2 April 2018.
Self-funded retirees on modest incomes will feel this impact most severely, but unfortunately those who will be most affected are often unaware. Mid-December polling by the Australia Institute suggests that while around half of all those over the age of 65 are opposed to the policy, around one-quarter of men and almost half of all women are undecided. It’s a difficult issue to convey, especially to those with limited knowledge of investing.
For those who do understand the potential loss of income, the extent to which the policy provides an incentive to sell down assets and move onto the age pension is unknown. Excess franking credits may also simply be transferred as they move from those who can’t use them to those who can. The policy is unlikely to affect the wealthy, who are in a position to reallocate asset portfolios, but will leave older Australians with modest retirement incomes, especially women, to bear the brunt.