Category: Features

Chris Bowen and the ALP want to trash two fundamental pillars of our tax policy

The Australian

25 January 2019

Robert Gottliebsen, Business Columnist

Let me explain simply the nub of where Chris Bowen and I differ over the so-called retirement and pensioners’ tax. I think once most Australians, including many ALP supporters, understand the fundamental pillars that underpin my view, they will be on my side rather than that of the Treasurer in waiting.

But first I want to express my appreciation to Chris Bowen for his willingness to debate the issue and I urge my readers to read every word he has written.

I might be old fashioned, but I believe passionately in two pillars of Australian taxation policy: The first pillar is that people in the same financial position (i.e. have the same assets and income) should be treated the same. Since federation all political parties have endorsed this anti-discrimination policy. Until now.

Secondly, where there are longstanding retirement rules under which people arrange their future when they cease working, there should be extensive grandfathering when fundamental changes are proposed. I am afraid both sides of politics have strayed from this pillar, but I can’t recall any group of politicians being so ruthless in their treatment of battling retirees and grandparents as Bill Shorten’s ALP.

Let me set out in the clearest possible terms how Bill Shorten and Chris Bowen are dismantling the first and second pillars. I believe they have been extremely poorly advised so I will put forward some ideas help them adjust their policy to conform with the above two pillars which I believe help unite our society.

Until now, both parties had an agreed policy whereby shareholders in a company would not be double taxed on company profits. Accordingly, when you receive a dividend from a company that dividend forms part of your taxable income. But you receive a credit for the tax already paid by the company (it’s called a franking credit) so there is no double taxation. If you are a retiree and have no other taxable income, of course you receive the corporate tax refund in cash.

If Chris Bowen had declared that all non-earning retirees can no longer receive the cashback refund or, where there were exemptions, then those exemptions applied to all people in that classification, I would have declared that his retirement and pensioners’ tax complied with the first pillar.

Instead, Shorten and Bowen discriminated between people with the same assets and income thus trashing the first pillar for the first time in our history.

Bill Shorten and Chris Bowen declared that if you had no taxable income but saved your money through an industry or certain retail funds then you would receive your cash refund entitlement “in full”. I repeat “in full”.

By contrast, if you are in exactly the same financial situation, again with no taxable income, but saved outside of superannuation or saved via some retail funds or most self-managed funds then you would not receive a cent of your cash refund entitlement. I repeat not a cent. There are more than a million Australians being discriminated against this way — probably more women than men.

There was an exemption for pensioners but again there was blatant discrimination — if you did not register by a set date you got hit by the tax. Never in our history has any set of politicians ever engaged in such blatant and unfair discrimination.

The ALP shadow ministers have minders who insulate them from the pleading letters/emails from salt-of-the-earth older Australians who have been hit hard while their retired friends in the same financial position are totally unaffected.

By contrast I have no minders to shield me. I am human and I let the letters/emails from wonderful people create anger and I described the industry funds as ALP mates. That was not fair. They have won the superannuation wars fair and square and not on a mates basis.

Shorten and Bowen defend their blatant discrimination by saying that because the industry and big retail funds happened to have members who were salary earners and paid tax, those salary earners’ tax payments can be credited to the retirees so they can receive their corporate tax cash refunds. That’s an insult to the intelligence of ordinary Australians. To mix up the taxes paid by one member of a fund with the tax status of an entirely separate person breaks all the rules. It’s a complete nonsense.

So, if the retirement and pensioner tax is to be fair it must apply to everyone in the same tax income/asset bracket and cannot exclude those in retail and industry funds. All must have their cash franking credit refunds blocked

Of course, we all know that if everyone was subject to the retirement and pensioner tax it would spark a riot among grandparents and retirees and would enrage their children.

So, if we are making the tax comply with the first pillar outlined above and apply it to all people equally, then we must grandfather it to comply with pillar two.

I would suggest that everyone be given a $15,000 limit on their cash franking credits. Make it a fixed sum so it will be reduced by inflation over the years. If Chris Bowen is right that there is a pool of rich people out there who will pay most of the tax, then this will not greatly affect his revenue. But while I can’t prove it, I think he is wrong. I believe the vast bulk of the $55 billion in projected revenue will be raised from battlers. If I am right then fair grandfathering would decimate the income projections.

The ALP is set to win a May election by one of the biggest margins in our history. So, Chris Bowen will claim that he has a mandate. But the Australian population is justifiably so angry with the Coalition that they want to teach it a lesson. In my view, a May election will be about venting voter anger against the Liberals and not the policies of either party. But under the accepted practice, Chris Bowen is entitled to claim a mandate.

So, after the election the retirement and pensioners tax will become law. We are going to be stuck with a precedent that promotes taxation discrimination. Who knows what politicians will do next time. With some justification, I don’t believe Bill Shorten fully understood this when he originally endorsed the policy.

Unfortunately, the ALP has made promises that spend the money. But there is a way out. The real issue is the level of franking credit benefit. Cut the total franking credits benefit (not just those credits received in cash) from 100 per cent of tax paid to say 95 or 90 per cent and end the illegal use of franking credits by international investors.

While many will oppose this, the measure conforms with my two pillars and does not create an incredibly dangerous and divisive precedent that shatters salt of the earth Australians.

Franking credit refunds ‘distort economic system’

The Australian

24 January 2019

Michael Roddan

The chief economist for the government’s 2014 Financial System Inquiry has called for dividend franking credits to be overhauled, hitting out at the “significant economic distortion” created by excess credit refunds for investors who pay no tax.

Kevin Davis, a professor of finance at University of Melbourne who was a panel member on David Murray’s landmark financial system review, said dividend imputation was designed to prevent double taxation of corporate profits.

“It wasn’t meant to lead to zero taxation of corporate income which occurs when dividends are paid to investors on zero marginal tax rates and rebates paid,” Mr Davis told The Australian.

“That has created a significant economic distortion, and while removing the rebate may be painful for those who have structured their investments to maximise gains from this tax arbitrage, such a change is warranted,” he said.

The government has repeatedly attacked Labor’s proposal to end cash rebates for excess franking credits for shareholders who pay little or no income tax, which is expected to increase government revenue by $56 billion over a decade.

The cost to the budget of the scheme has dramatically increased since it was introduced by the Howard government, when the measure cost just $500 million a year. Since then, many investors and self-managed superannuation fund operators have shifted all their assets into equities to take advantage of the franking credit rebate.

According to research by University of Sydney senior lecturer Andrew Ainsworth, small retail “mum and dad” shareholders are most likely to “aggressively” buy and sell shares around dividend payment dates to receive franking credit refunds.

Dr Ainsworth, a former Reserve Bank analyst who specialises in researching dividends and the imputation tax system, has urged a parliamentary committee examining Labor’s planned franking credit ban to investigate short-term trading on the sharemarket.

Retail investors who engaged in short-term trading may be harming the federal budget by claiming refunds in breach of the so-called 45-day rule, Dr Ainsworth said.

Introduced in 1997, the rule requires shareholders to hold stock for 45 days around the ex-dividend day in an attempt to limit short-term trading. However, there is little evidence the laws are enforced.

“I believe it is important to know if the 45-day holding period rule is enforced, and how,” Dr Ainsworth said. “If this rule is not adequately enforced then rectifying this would be a more equitable way to address the impact of franking credits on the federal budget than the proposed policy under consideration by the committee.

“A focus on short-term trading and the impact it has on the federal budget is worthy of investigation. I would argue that this should receive attention ahead of policy changes that target long-term investors.”

Labor is under pressure to overhaul its franking credit ban following a series of public hearings where angry retirees and shareholders lined up to slam the opposition’s proposal. The House of Representatives economics committee will be holding a further series of hearings across marginal Queensland electorates later this month.

Dr Ainsworth’s research has found that individual investors increase share buying “aggressively” before dividend payment dates and ramp up selling after payment dates in order to take advantage of the imputation tax credit.

The franking credits allow investors to lower their personal tax liabilities. Shareholders who can’t access the 50 per cent capital gains tax discount, which applies to assets held for more than a year, will prefer buying stocks to gain the dividends rather than expecting stock prices to go up over the long term.

Dr Ainsworth has also found this type of trading had a “material price impact” on shares after the dividend payment date, suggesting the dividend imputation system was leading to distortions in the market pricing of shares.

According to an analysis of the proposal by the independent Parliamentary Budget Office, 53 per cent of excess franking credits claimed by self-managed super funds were to funds with more than $2.44m in assets. Funds with more than $1m claimed 82 per cent of the franking credits, worth $2.1bn a year.

Grattan Institute senior fellow Danielle Wood said it was a “far from perfect” proposal, but endorsed it as a way to improve the health of the budget amid an ageing population.

Labor franking credits policy creates superannuation class divide, says Robert Millner

The Australian

Eli Greenblat

24 January 2019

Billionaire investor Robert Millner has raised concerns that Labor’s policy to rip up the franking credit system on dividends could create two different classes of investors.

Mr Millner also expressed concern that Labor’s changes also hand an advantage to union-controlled industry funds, which will mostly maintain the rich flow of franking refunds.

Speaking to The Australian on Thursday after the $3 billion listed investment company Milton Corporation, which he chairs, issued its half-year profit results, Mr Millner said the proposed ALP policy could also encourage investors to shift out of Australian equities and place their money into riskier assets such as property and overseas shares.

“It doesn’t apply to everybody, but it does apply to a certain few,’’ Mr Millner said.

“It might make franked dividends less attractive for some people, and if people think they aren’t going to get those refunds, those people have relied on those refunds might put their capital to work somewhere else.

“If they do decide to exit equities, do they put it into property? Or do they go overseas?”

Current ALP policy is to close down a concession that gives cash refunds for excess dividend imputation credits. Most industry funds and some retail funds could still harvest franking credits because of the dominance in these funds of workers still in accumulation phase, rather than pension phase of their policies. Franking credits wouldn’t offset the whole tax liability for accounts in accumulation phase, effectively making industry funds exempt.

Opponents of the ALP scheme, led by the government, have accused shadow Treasurer Chris Bowen of allowing this loophole, which greatly protects industry funds – many of which are run by trade unions.

Mr Millner said this created an unfair advantage for one group of investors, and gave more power to the unions.

“Why should they have the benefit and no one else?” he asked.

“I think what will happen, if we do get a change of government, is that we could get a divide in the community.

“Obviously the unions are speaking out on what they would like to be doing, but not everybody likes to be in the union.’’

Mr Millner’s family is worth more than $1 billion, accrued over more than 100 years of association with its publicly listed family business, Washington H. Soul Pattinson, valued at more than $6.15bn, and its controlling stake in Brickworks, which is Australia’s biggest brick maker and valued at more than $2.4bn.

In Milton’s half-year review for shareholders, Mr Millner also argued the ALP policy on refundability of franking credits was inequitable and could ramp up the cost of capital in Australia.

“Milton notes and remains vigilant about the policy proposal from the ALP to end the refundability of franking credits to a certain group of investors,” he wrote.

“We believe the policy to be inequitable, likely to reduce the attractiveness of equity investments and increase the cost of capital for all Australians. Milton will continue to advocate on behalf of shareholders and encourage concerned shareholders to highlight the issue by contacting their local political representatives.’’

Over the last two weeks leading investment funds such as BKI Investment, Mirrabooka, Amcil and Australian Foundation Investment Co have criticised the ALP policy and acted to protect their own shareholders by dumping more than $120 million worth of shares in blue-chip miners BHP and Rio Tinto to pay for special dividends. They have rushed out these dividends to beat any ALP policy applicable from July 1, assuming the ALP win the upcoming election.

Mr Bowen has previously argued that Australia’s dividend imputation system was introduced by former ALP Treasurer and Prime Minister Paul Keating to eliminate double taxation on dividends from company profits.

But under Coalition Prime Minister John Howard and Treasurer Peter Costello, a concession was created that allowed some individuals and superannuation funds to receive a cash refund from the ATO if their imputation credits exceeded the tax they owed.

“Because of this change, Australia is the only OECD country with a fully refundable dividend imputation credit system – a concession which has grown at a rapid rate and now costs the budget more than $5 billion dollars a year,” Mr Bowen said.

“Failing to reform this unfair revenue leakage puts a greater tax burden on low and middle income working Australians. A Shorten Labor Government will close down the concession created by Howard and Costello, and return to the arrangement first introduced by Hawke and Keating – so that imputation credits can be used to reduce tax, but not for cash refunds.”

Closing down this concession will save the budget $11.4 billion over the forward estimates from 2018-19, and improve the budget bottom line by $59 billion over the medium term, Mr Bowen has argued.

Brickworks joins special dividend rush to beat Labor franking credit change

The Australian

Eli Greenblat

24 January 2019

The trickle of listed investment companies paying special dividends to shareholders to beat Labor’s franking credit changes is threatening to become a flood.

Following in the footsteps of companies like Australian Foundation Investment Co, the $1.1 billion Brickworks Investment Company issued a surprise dividend on Wednesday morning and vowing to pay another one later this year.

Brickworks Investment, which is part of the Washington H. Soul Pattinson investment empire, has also dumped $15 million in shares of BHP to capture the value of franked dividends on offer from the mining company, although it then bought back some shares in the company.

It is the latest listed equities fund to re-engineer its share portfolio in the face of the looming changes to dividend franking proposed by the ALP, as its investment managers scramble to protect the value of dividends for their mostly elderly, retired shareholders.

In the last week the nation’s biggest listed investment company Australian Foundation Investment Co dumped $120 million worth of shares in BHP and Rio Tinto and paid an unscheduled dividend to beat the stripping of cash refunds for excess dividend imputation credits by an incoming ALP government.

It has been joined by other investment companies Mirrabooka and Amcil that have put dividends into the hands of its shareholders to ensure the franking credits are passed on before their value is greatly diminished by the ALP scheme.

Brickworks Investment, which has a portfolio of blue chip stocks worth more than $1.1 billion, unveiled a fully franked interim dividend of 3.625 cents per share, as well as a special dividend of 1.5 cents per share, both payable on February 28.

Brickworks Investment also intends to pay another special dividend of at least 1 cent per share at the end of the financial year as it shifts $16.75 million of imputation credits on its books to beat any ALP policy that could come into effect if the party wins the federal election.

“In recent months we have been overwhelmed by the level of angst in the investment community regarding Labor’s proposal to eliminate cash refunds of excess franking credits,Brickworks Investment said as it posted a 104 per cent rise in December half profit to $47.09 million.

Brickworks Investment portfolio manager Tom Millner told The Australian the special dividends were directly linked to the threat to franking credits by the ALP. He said his shareholders were greatly concerned about the policy.

“It is a big concern,” he said.

“We don’t exactly know how much of our shareholder base it effects, but we are paying a fully franked 1.5 cents per share dividend and this shows we are concerned about it. And there is more to come because we have this concern,Mr Millner said.

He described the ALP policy as a poor one.

‘’They (the ALP) are not listening. Maybe the voters will tell them no one likes it. It will affect a lot of people nationally and it’s not a good policy, simple as that.”

A Shorten Labor Government has vowed to make the tax system fairer by closing down a concession that gives cash refunds for excess dividend imputation credits. Closing down this concession will save the budget $11.4bn over the forward estimates from 2018-19, and improve the budget bottom line by $59bn over the medium term, shadow Treasurer Chris Bowen has claimed.

But even the threat of the policy has been enough to force the hand of investment managers who have begun to sell down shares and pull the trigger on special dividends to ensure the value of franking credits are protected and handed over to shareholders.

AFIC chief executive Mark Freeman, who is also the CEO of Amcil and Mirrabooka,

revealed this week the fund had sold down almost half its stake in Rio Tinto and 3 per cent of its holding in BHP to pass on the franking credits to its shareholders as soon as possible.

He told The Australian that the feedback from his 130,000 shareholders, who were mostly elderly retirees, that the ALP proposed changes to franking credits would hurt them financially.

“This is going to hurt a lot of people who are saying ‘I’m not rich, I’m not wealthy and why am I being forced to go on a higher tax bracket through this?’’

Turning to its financial performance for the December half, Brickworks Investment said its strong rise in net profit was attributable to higher dividends received from companies such as New Hope, AGL, Woodside Petroleum, BHP and Sydney Airport. It also harvested $24 million in special dividend income from BHP, Wesfarmers, Telstra, IAG and Woolworths.

It said it believed the markets were now rolling off the top of the cycle as evidenced by falling share prices, especially high growth stocks, falling commodity prices, tighter credit conditions, sliding real estate values and flat domestic interest rates.

Brickworks Investment co-portfolio manager Will Culbert said the decline in domestic markets over the last six months provided the investor with some good investment opportunities.

In the half it sold down shares in Flight Centre, IOOF and Perpetual and new positions in the portfolio included Coles Group, Platinum Asset Management, Magellan Financial Group, Stockland and Pact Group.

Dear Bill: Don’t let Chris Bowen blow it on franking credits

The Australian

Robert Gottliebsen

22 January 2019

Today I feel the need to write an open letter to opposition leader Bill Shorten:

Dear Bill, your treasurer-in-waiting Chris Bowen has allowed himself to be advised by a group of people who did not understand how franking credits work in 2019, relying instead on old, outdated tax data.

They led him to devise what is arguably the worst taxation measure proposed in Australia since Harold Holt announced plans to drop tax deductibility for interest payments in November 1960.

Most ALP people now know that Chris has made a mistake.

I suspect he also knows, but can’t bring himself to admit the error. So he’s now descending into emotion — a sure sign of a person in trouble.

If the Coalition is stupid enough to call a May House of Representative election, you will be prime minister with a huge majority. Most people agree that the Coalition’s three prime minister stint is a national disgrace and accordingly a vast number of Australians want to punish them. It would not matter what your policies were (or theirs), those angry Australians will put you in the lodge.

I don’t think the Coalition is smart enough to manoeuvre the parliament so that the House of Representatives election in held in November. But on the off chance that they’ll hold out for a November poll, Australians will, of course, vent their fury by decimating the Coalition Senate membership. But then the November election will then be about issues.

Except in situations of extreme voter anger, I don’t think any party in the developed world could be elected after a campaign based on the ALP’s retirement and pensioner tax (RPT). And as I will explain below, Bowen’s negative gearing plan is not in the same category as RPT.

I want good government for Australia and it’s important for the nation that both parties are able to govern. Part of the job of being prime minister is recognising when a minister has made an honest mistake and then helping that minister in the rectification process. Accordingly, Bill, that makes Chris’ mistake a test for you and not just your treasurer-in-waiting.

Paul Keating introduced dividend franking to avoid double taxation on company profits. It was brilliant policy. The idea was that wherever you earned a business profit, as a sole trader or as a large public company, there would be a similar rate of taxation.

When he introduced the policy, it’s true that franking credits had to be offset against earned or other investment income.

But over time we introduced a retirement system where low income/ asset people would still receive the pension. And, up to a limit, pensions from superannuation funds would be tax free. The cash franking credits became an integral part of that system and abolishing them requires major changes to the retirement system.

Not only did Chris not propose the required retired retirement system changes, but he’s dividing retirees with exactly the same assets and income into two baskets — those who receive cash franking credits and those that do not. The retirees who are to receive cash franking credits have their assets invested with industry funds and some big retail funds. The rest miss out.

Taxing people on the basis of who manages their money is without precedent in the developed world. I don’t think there is an Australian, including yourself, who would agree with such a policy. The fact that the big superannuation funds have non-retired members whom the retirees can sponge on to get their cash franking credits will cut no ice with anyone.

I don’t think leaders in the industry fund movement, including the likes of the likes of Greg Combet, Steve Bracks and Ian Silk, will want their funds carrying the long term tarnish of money obtained so unfairly. It always comes back to bite you and they are already winning fair and square.

And on the same theme, pensioners who were pensioners on a certain date will obtain cash franking credits but those that come after miss out and are therefore subject to RPT. It’s just wrong.

If the ALP is unhappy about franking credits and needs to raise money, then there are two clear courses: stop the racket that enables international shareholders to illegally obtain franking credits (I can’t imagine why the Coalition has not done this) or simply reduce the franking credits benefit to everyone (Australians might receive, say 95 per cent of their franking credit entitlement).

While I’d probably oppose such a measure, I’d have to recognise that it was introduced fairly and that everyone was treated equally.

Now the flow-on of the ALP’s RPT plans are emerging. As Eli Greenblat revealed yesterday, our largest investment company, Australian Foundation Investment Co, as a non-favoured manager is reducing its holdings in BHP and Rio Tinto in anticipation of an ALP government and Chris Bowen is emotionally telling Australians to invest overseas. It’s a sure sign of a shadow minister who has become rattled by his own mistake. And he keeps saying he is attacking the rich. But only rich people who are stupid will be affected.

At the moment Bowen is also under pressure for his negative gearing policy. Had the ALP won the last election and Chris introduced that policy we would not be in the current mess. The problem now is that, partly in reaction to the negative gearing policy not being introduced, we have slashed lending. The severity of the bank lending clamps is a disaster. Putting the old Bowen plan on top of it now would be catastrophic. You must first normalise the banks and property finance, then you can look at the Bowen negative gearing plan. It is in a totally different category to RPT.

Footnote: The $235 million Amcil listed investment fund has joined Australian Foundation in being forced to in dump shares in BHP and pay an unscheduled divided in fear of the actions of a Shorten government.

Retail funds dominate in 50 worst-performing super investments

The Australian

Anthony Klan, Journalist

19 January 2019

Every one of the 50 worst-performing balanced superannuation investments over seven years has been operated by retail funds such as ANZ, Westpac and IOOF, with just one product offered by the for-profit sector making it on to the list of the top 135 performers.

In revelations that categorically bring to an end the fierce three-decade dispute between retail and industry funds over which is superior, secretive and highly detailed industry data obtained by The Weekend Australian shows that regardless of the investment timeframe or level of risk involved, retail funds are unquestionably consistently at the bottom and industry funds are consistently at the top.

Despite every worker being forced to divert a portion of every pay packet into compulsory super since it was introduced in 1992 — and the key choice most people face being whether to invest in an industry fund or a retail fund — no list of worst- performing super investments has ever been made public, with analyst companies refusing to release them.

Retail and industry funds account for more than $1.28 trillion of the nation’s retirement savings and the revelations back renewed calls from federal minister Kelly O’Dwyer this week for the creation of a Future Fund-style national retirement fund to keep the nation’s super savings out of the hands of the “many rent seekers and ticket clippers” in the sector.

The highly detailed data from SuperRatings, considered the most comprehensive and accurate in the nation and used by the Productivity Commission in preparing last week’s report into the $2.8tn sector, lists 278 “balanced” super options offered by the nation’s retail and industry funds.

Over the seven years to March 2018, of all funds in “accumulation” phase, where the member is still working, the 50 worst-performing were all operated by retail funds and all but one of the 17 worst performers were managed by Westpac’s BT or ANZ’s OnePath.

OnePath Managed Growth was the worst-performing balanced option over the seven- year period, delivering an annual average return of 5.17 per cent.

Of the top 135 performers, just one was a retail fund, the Vanguard Growth Index Fund, which came in at 28th place.

Seven years is considered the best timeframe for comparisons because it is the longest period for which reliable data is available, however the results are similar over one, three and five years, and whether “growth”, “cash” or other types of options are examined.

The data looks at balanced options, determined as those with between 60 and 76 per cent of investments in “growth” assets such as shares, and the remainder in defensive assets, such as cash.

Because there is no industry standard, some options in the list may call themselves “growth”, however they are all balanced based on SuperRatings’ criteria.

There are many more industry funds in the list because retail funds were far less likely to disclose their performance.

According to experts, retail funds were likely to report only their best performers, so the actual performance of that sector is likely to be worse than indicated.

The Productivity Commission declined to name any funds in its reports on super, despite saying the Australian Prudential Regulation Authority should improve its “inconsistent” super data to help investors compare.

Retail funds have for many years argued APRA data showing their poor performance can’t be used to judge them because it looks at only the overall performance of “funds”, which usually operate numerous different investment options.

This SuperRatings data specifically examines those individual options, negating that argument.

Age Pension liability ‘will fall faster than projected’

The Australian

Michael Roddan, Reporter

28 December 2018

Confidential Treasury modelling of the nation’s reliance on the Age Pension has found
the amount of money spent on welfare for retirees will fall faster than previously
expected as bigger superannuation nest eggs push Australians into self-funded
retirement.

The unreleased projections of the share of GDP Australia spends on the Age Pension
is “consistent” with a fall of 2.7 per cent last year to 2.5 per cent in 2038. This is
significantly lower than previous estimates of the cost of providing the pension.

The government’s 2015 Intergenerational Report had the cost of the Age Pension
holding steady at about 3 per cent of GDP. In 2002, the Age Pension cost 2.9 per cent
of GDP and was forecast to rise to 4.6 per cent by 2042.

Documents obtained by The Australian under Freedom of Information laws reveal
Treasury noted projections by actuarial firm Rice Warner were consistent with its
revised, but not publicly released, modelling using the new Treasury system MARIA
(Model of Australian Retirement Incomes and Assets).

“Rice Warner projections are consistent with Treasury’s medium-term Age Pension
expenditure profile and longer-term projections from MARIA … though Treasury’s
projections have not been released yet,” notes an email from Treasury’s modelling
division in the tax analysis group.

The paper released in May by Rice Warner chief executive Michael Rice found the
share of the population eligible to receive the Age Pension would decline from about
69 per cent last year to 57 per cent in 2038.

This was because the superannuation system was delivering larger nest eggs for
savers, putting them outside the Age Pension assets test.

The revelations that Treasury is also expecting a falling Age Pension burden comes
after the government recently scrapped a planned move to lift the retirement age to 70.

The documents obtained by The Australian showed Treasury officials considered it
would be “good to flag” the comparison between the Rice Warner report and the
department’s MARIA modelling with former minister for revenue and financial
services Kelly O’Dwyer.

While the most recent Intergenerational Report forecast “relatively stable” Age
Pension reliance, at about 3 per cent of GDP, Treasury said the lower estimates gained
from its MARIA modelling were “not unexpected” as they reflected “updated data,
modelling and policy changes” since the 2015 Intergenerational Report.
However, Treasury has not released the assumptions underpinning its MARIA
modelling, which would allow third parties, such as the independent Parliamentary Budget Office, to check the government’s projections.

Because of the fall in the reliance on the Age Pension, Rice Warner suggested using
the savings to fund increased rental assistance for age pensioners.

Michael Roddan, Reporter

Companies hoarding $45bn in franking credits

The Australian

James Kirby, Wealth Editor

15 December 2018

A staggering $45 billion worth of franking credits are being hoarded by some of
Australia’s biggest companies and demands to release them before an ALP
government comes to power are rising fast.

New research on some of our biggest stocks reveals companies such as Rio, Fortescue
and Caltex have a treasure trove of stored up franking credits. In an extreme example,
Harvey Norman’s franking credits are equal to 14 per cent of the retailer’s $3.7bn
market value.

But these credits will be useless to a significant shareholder segment if the ALP wins
the next election, as the opposition plans to scrap the cash rebates retiree investors
receive on franking credits despite franked shares making up the backbone of most
small shareholder portfolios.

“If franking credit was a listed company, it would rank as the seventh biggest company
in Australia,” says Hasan Tevfik, a senior analyst at MST Marquee who has run the
numbers on the ASX. Tevfik’s research shows major companies are hanging onto
franking credits when there appears to be very little reason to do so.

JB Hi-Fi, Woodside, Woolworths and Flight Centre — all favourites with retail
shareholders — also appear high on the list that has been compiled excluding financial
stocks since banks generally distribute all their franking credits on a regular basis.

BHP and Rio have already made some effort to release their excess franking credits but the report shows that, even including their planned measures, they still have franking credits that are relatively high — representing about 7.4 per cent of the market capitalisation at BHP and 10.3 per cent at Rio.

In an ideal world, listed companies would have little or no franking credits stacked up
on the balance sheet but, citing conservatism, many blue-chip groups use them as a
buffer to be used in tough times.

The problem now is such conservatism could carry a high cost that will be shouldered
by older investors if the ALP goes ahead with its controversial plans. Opposition
Treasury spokesman Chris Bowen has repeatedly said he will not budge on the issue.

Typically, companies can get the franking credit value off their books and into small
shareholders’ pockets through special dividends or buy-back programs.

The new research follows a similar exercise a year ago by Macquarie Bank. That
report, based on results in the year to June 2017, showed the worst companies in terms
of franking credits had been Salmat, The Reject Shop, New Hope Corporation,
Cabcharge and BHP.

Macquarie Bank has been collecting franking credit data for more than a decade as
investors have always kept an eye on credit balances to ensure capital management
was optimised.

Analysts argue that companies with franking credits banked up on their books may not
be acting in the best interest of shareholders if they resist actively distributing those
credits.

“We know some of these companies have resisted and boards have waved off
questioning shareholders … but we find the excuses poor,” says Tevfik. “The ALP policy will make franking credits worth less to the aggregate shareholder.”

Under existing arrangements, the vast majority of retirees are tax free. When
Australian companies pay dividends they have franking credits attached — the system
was originally introduced by the Labor government. Shareholders who have tax bills
can offset their franking credits from their annual tax.

However, retiree shareholders — who are tax free — don’t have a tax bill to offset. To solve this issue, the Howard government introduced a rebate plan where retirees could
get a cash cheque in lieu of their shareholder rights in relation to franking.

The ALP opposition has proposed scrapping this arrangement with no compensation
— retirees who are on pensions or part-pensions are exempt.

It is estimated the average retiree investor gets about $6000 a year in franking credits.
In recent weeks the issue has become a key area of political debate as fund managers
led by Wilson Asset Management’s Geoff Wilson protest against the scheme.

Opponents suggest the plan is discriminatory as it isolates a specific section of the
community — older independent investors — on a tax measure.

Wilson, who raised a petition against the change, believes the ALP measure is
essentially unfair and penalises investors who have constructed their portfolios on
what many had taken to be a settled government policy.

Earlier this year he suggested: “What disturbs me is that I don’t think people
understand how crippling these changes will be to people who have abided by all the
laws for the last 20 years.”

The debate has been inflamed by union-backed industry super funds suggesting they
would not be affected by the measure.

This is because franking credits are not being terminated — rather, it is the right of
independent retirees to receive cash for those credits that is being terminated. As a
result, most large-scale funds — industry or retail — will not be affected since they
can still use the franking credit offsets.

With $45bn worth of credits yet to be distributed, time is running out for the biggest
hoarders.

James Kirby, Wealth Editor

Grey army stirs for battle against Labor’s retiree tax

The Australian

Joe Kelly, Political Reporter and Paige Taylor WA Bureau Chief

11 December 2018

Labor MPs believe turmoil in the Coalition is masking widespread dismay and anger
among older voters over the plan to introduce what critics call a “retiree tax”.

“It’s quite polarised,” a Labor MP said yesterday. “You get reaction from self-funded
retirees who say, ‘we pay the household expenses out of that cash refund and we’ve
looked after ourselves for years’. There’s a little bit of that”.

A special Newspoll conducted for The Australian bears out Labor’s internal concerns over how the policy has been received. Support for the $55.7 billion plan to scrap the
refundable tax credits on shares has fallen three percentage points since March, while
almost half of those surveyed, 48 per cent, were opposed.

An age breakdown reveals the over-65 bracket is most strongly opposed to the ALP’s
plan, with 62 per cent of voters in that demographic registering their disapproval of the
Labor policy.

Under the commitment, only pensioners and other recipients of government
allowances (such as the carer payment or parenting payment) will still receive the cash
refunds after Bill Shorten modified the plan earlier this year, following a backlash led
by retiree groups. But the policy tweaks won’t help John and Jan Bain, who today
officially join the nation’s grey army of 1.1 million self-funded retirees. Mrs Bain, 74,
will today work her last shift as a physiotherapist in their home town of Bunbury,
170km south of Perth, while husband John, 72, left his job as a livestock agent 14
years ago after a stroke, then relied on sound money advice to maintain the couple’s
finances on the long road back to good health.

“It’s still a fairly slippery slope that we are walking on moneywise, but I think that’s
true for a lot of self-funded retirees,” Mr Bain said yesterday. “The rules have got so bloody complicated.”

Once aligned to the Liberal Party, Mr Bain describes himself as a “drifting” rather than
a swinging voter these days. He said he was appalled by the recent chaos in the
Coalition and was unsure who to vote for at next year’s election, but felt he could not
support Labor’s cuts to the refundable tax credits on shares because it would punish
“middle Australia”.

“We think that if this gets in it will end up costing us somewhere between $10,000 and
$12,000 a year, somewhere around there,” Mr Bain said. “We have got a very good
financial adviser … but we are not rich.”

Only 46 per cent of Labor voters agree with the plan, while approval drops to just 15
per cent among Coalition supporters. Total support is running at 30 per cent, down
from 33 per cent in March when the last Newspoll on the issue was conducted.

Opposition to the policy has also dropped from 50 per cent to 48 per cent while the
number of voters undecided on the shake-up has lifted from 17 to 22 per cent. Among
Coalition voters, opposition is running at 71 per cent compared with 33 per cent for
Labor supporters.

The refunding of franking credits was a system implemented in the Howard
government’s 2001 budget, allowing super funds and individuals to receive cash
payments if their dividend imputation credits exceeded their total tax liabilities.

Estimates suggest about 33 per cent of cash refunds go to individuals, 60 per cent to
self-managed super funds and about 7 per cent to APRA-regulated funds.

The Labor policy was framed as a way to close down a “tax loophole that mainly
benefits millionaires”. Opposition Treasury spokesman Chris Bowen warned that the
cost of refunding the dividend imputation credits had become unsustainable.

The cost of the concession has ballooned from about $550 million when the measure
was introduced by former Liberal treasurer Peter Costello — when the budget was in
surplus — to more than $5bn a year. Labor’s policy would raise $55.7bn over a decade
from July next year if Mr Shorten wins the next election.

The self-managed super fund sector and seniors groups have warned the Labor policy
will bring about a number of unintended consequences while continuing to benefit the wealthy who have enough tax liabilities to exhaust the full value of their franking
credits.

Dividend imputation was introduced in Australia in 1987 to avoid double taxation of
company dividends. It provides a tax credit to shareholders for tax already paid by the
company on their behalf. In a submission to the parliamentary standing committee on
economics, which is conducting an inquiry into the removal of refundable franking
credits, Michael Rice, the chief executive of actuarial firm Rice Warner, warned that
there would be behavioural changes arising from the Labor policy.

“The main groups affected would be retirees on modest incomes holding equities
directly and many SMSFs which have assets predominantly in pension accounts,” Mr
Rice said.

He suggested these groups would shift their assets out of Australian equities, attain
higher yields in other assets such as overseas-listed shares or infrastructure trusts or
move their assets into unfranked Australian equities.

He suggested that some self-funded retirees would increase drawdowns from their
superannuation to preserve their current levels of income, resulting in more people
receiving the age pension earlier in life — an outcome that would impose additional
costs on the government.

One consequence could see more people closing their SMSF and moving their assets
into an APRA-regulated fund where their franking credits could be offset against other
taxable income within the fund.

Ways to sidestep Labor’s ‘unfair and illogical’ tax grab on super

The Australian

James Gerrard

1 December  2018

Earlier this week, the man who may be our next treasurer, Chris Bowen, reiterated the
ALP was not interested in amending its plans to scrap cash rebates for franking credits
— a key element of income for many retirees.

The crux of the issue is that retirees, who in good conscience saved money in super,
are having the rug pulled from under them. They are being treated as companies,
effectively being taxed at 30 per cent on part of their income, with their tax-exempt
super status being ignored.

I am going to run through several scenarios that would allow an investor to sidestep
the franking credit plan, but first it does need to be put in perspective. The Labor
Party’s plans to make a retrospective change to super not only adversely affects about
one million retirees who are not eligible for a part or full age pension, but also
undermines the confidence in the system.

Why would the younger generation bother trying to save for retirement by way of
extra super contributions when governments (both Coalition and Labor) make taxgrabbing
changes that are backward looking?

The result? Less money saved by Australians for retirement and a heavier reliance on
the public purse.

Geoff Wilson, founder of Wilson Asset Management, says: “This is bad policy. What
Labor doesn’t understand is that all Australians are intelligent. They will adjust their
finances to minimise the impact of this money grab from Labor. The $5 billion-plus
Labor talk about raising per year is discriminatory, unfair and illogical. The money they believe they will raise is a mirage.”

Wilson is best known among investors for a string of listed investment companies
such as WAM Capital and WAM Leaders fund. In common with other LICs such as
AFIC and Argo, Wilson will face a dilemma if the new rules become reality — the
LICs will lose out as investors steer away from products where the franking credit
attractions have been removed for retired investors.

Indeed, Wilson said he would be forced to convert all his group’s LICs to unit trusts if
the ALP win, and other LICs would no doubt do the same creating legal costs for
every LIC in the market.

As professionals such as Wilson think the issue through, the biggest problem is that
not all retirees will make the right decision when these changes arrive and some will
expose themselves to riskier investments chasing unfranked dividends. Timing is also
an issue. With the royal commission putting a dampener on bank share prices, anyone
thinking of bailing out of fully franked bank shares to unfranked investments will lock
in a loss of 10 per cent over the past 12 months.

For the people thinking about what they can do to counteract the impact of the policy,
here are three potential workarounds:

1. If you don’t want to lose your exposure to fully franked blue-chip shares such as the
banks, BHP and Wesfarmers, one option is to sell the shares the day before they
declare their dividend, known as the ex-dividend date. You then buy the stock back the
next day after the share price falls. The problem with this approach is that the share
price usually falls by the cash dividend amount alone, not by the total value of the cash
dividend and franking credits.

2. An alternative strategy that is gaining traction with retirees is to move into listed
property investments via real estate investment trusts, which are seen by many as the
closest comparable investment to fully franked bank shares. REITS are property trust
structures that trade on the ASX. Unlike normal shares on the ASX, REITS do not
withhold tax as all distributions are taxed in the hand of the investor.

3. For the more passive investor, there are several ETFs that can invest in unfranked
investments such as Betashares Legg Mason Real Income Fund that holds a portfolio
of largely unfranked property, utilities and infrastructure assets While it is still too early to panic, the writing is on the wall with regard to the scrapping of cash refunds on excess imputation credits.

James Gerrard is the principal and director of financial planning firm
FinancialAdvisor.com.au.

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