Within a week of announcing his new policy to rip $59 billion from Australia’s retirees over the next decade, opposition leader Bill Shorten was giving ground, indicating Labor would soften the impact on pensioners and part-pensioners.
For days the media had run stories about how the changes to the taxation of dividends would harm retirees who rely on franked dividends from shares to bolster the income from their retirement savings and supplement pension payments.
While these people may get some relief from a future Labor government, the reality remains 1.125 million SMSF members will not. Most will probably suffer a loss of income from their share portfolios.
Investment in companies paying franked dividends – inside and outside an SMSF – has been a sensible investment strategy for SMSFs with interest rates at record lows. On average, SMSFs devote 29.5 per cent of their assets to Australian shares. Some have a much larger allocation to shares and, indeed, may not invest much in anything else.
Feedback we’ve had from our members with a high concentration of their assets in shares is that some expect to lose close to 30 per cent of their retirement income. This is unsurprising because, in effect, a new tax of 30 per cent (the company tax rate) will be applied to them.
Let’s be clear: franked dividends are not a tax concession nor a tax lurk for the so-called rich. They are a tax credit for the owners of shares whose dividend income has already been taxed in the form of company profits.
Both sides of politics support the concept of imputation credits to avoid double taxation of income derived from shares. In fact, the Hawke-Keating government introduced the idea and the Howard-Costello government extended it to allow for the imputation rebate to be paid if the value of the tax credit exceeds the shareholder’s overall tax liabilities. At that time, Labor also supported this extension as it was agreed it made imputation fairer.
In other words, if you’ve paid too much tax, you get a refund. If you are owed a tax rebate, you should get all of it. This principle has long been embedded in the tax system.
Shorten’s plan contradicts past positions held by Labor, unfairly targets one group in the community and appears to be a blatant tax grab to fund cash handouts Labor will promise to boost its election prospects.
Super needs a long-term plan
We’ve long argued changes to superannuation should only be made in the context of a coherent framework for a retirement savings system, starting with a proper definition of the objective of super and setting performance benchmarks for the system. Without the discipline of such a framework, governments will be free to plunder Australians’ retirement savings at will.
We have argued strongly that the definition adopted by the government – that superannuation is to supplement and substitute the age pension – is short-sighted and vague.
The age pension should not be the central pillar of a retirement system – it should be just for those who need it while everyone else is encouraged to become financially independent in retirement. Tax incentives recognise superannuation is mandatory saving for the future and entails current spending sacrifice.
Further, we need to set a performance benchmark. Most comparable countries have adopted the concept of a reasonable replacement rate, which is set at about two-thirds of pre-retirement, post-tax income and which will afford people a decent standard of living in retirement.
In reframing a better retirement savings system, some changes may have to be made to taxation. But they should be made in the context of a long-term plan for an adequate and sustainable system, not to bail out governments along the way.
The superannuation policy Labor took to the 2016 election was:
to limit tax-free income from savings in retirement to $75,000, affecting balances above $1.5 million, and
to extend the Division 293 rate of 30 per cent tax on superannuation contributions to people on incomes above $250,000, previously $300,000.
The coalition government subsequently picked up both ideas in essence. A balance cap of $1.6 million was applied rather than an income threshold set, but the result was much the same – a tax-free income of about $80,000 in retirement.
Labor’s policy said: “If elected, these will be the final and only changes Labor will make to the tax treatment of superannuation.”
It wasn’t elected, so it seems now all bets are off when it comes to superannuation tax policy.