Category: Newspaper/Blog Articles/Hansard

Can a surviving spouse claim their deceased spouse’s super while being executor of their estate?

By Shaun Backhaus (sbackhaus@dbalawyers.com.au), Lawyer and Daniel Butler (dbutler@dbalawyers.com.au), Director, DBA Lawyers

The recent case of Burgess v Burgess [2018] WASC 279 (‘Burgess’) continues a line of cases that consider the conflict that arises where a person acts as executor of a deceased estate while also receiving superannuation death benefits in their personal capacity.

Broadly, Burgess and the following cases revolve around the executor/administrator’s duty to collect assets of the deceased on behalf of an estate. As a fiduciary role, an executor/administrator must not, without proper authorisation, allow their personal interests to conflict with their obligations owed to the estate.

These cases are sure to have an increasing impact on death and succession planning in an SMSF context as around 70% of SMSFs are two-member funds and, in relation to couples, each spouse typically appoints their spouse as executor of their estate. Accordingly, many surviving spouses may thrust into a position of potential conflict in relation to their duties as an SMSF trustee\director and as an executor.

McIntosh v McIntosh – Where an administrator was found to be conflicted

McIntosh v McIntosh [2014] QSC 99 (‘McIntosh’) involved a mother who was appointed as the administrator of her deceased son’s estate. While acting in that role, the mother also applied to three of her son’s industry/retail super funds to receive his death benefits in her personal capacity, which she received. If these death benefits had instead been paid to the estate they would have been distributed equally between her and her former husband (as the deceased parents) under the laws of intestacy in Queensland as their son died without a will.

After some legal posturing between the mother’s and the father’s lawyers, the mother filed an application in the Queensland Supreme Court to determine the matter which found:

… there was a clear conflict of duty … contrary to her fiduciary duties as administrator. When the mother made application to each of the superannuation funds for the moneys to be paid to her personally rather than to the estate, she was preferring her own interests to her duty as legal personal representative to make an application for the funds to be paid to her as legal personal representative. She was in a situation of conflict which she resolved in favour of her own interests. As such she acted … in breach of her fiduciary duty as administrator of the estate …

Accordingly, the mother was required to account to the estate for the super benefits she had personally received. Also of note was in this case was the fact that the mother was a nominated beneficiary in respect of each of the super funds via non-binding nominations. Had binding death benefit nominations (‘BDBNs’) been in place, no conflict would have arisen. For further analysis of this case click here.

Brine v Carter – executor was held not to be conflicted

Brine v Carter [2015] SASC 205 examined a potential conflict arising in the case of an executor which did not require the executor to account to the estate. Professor Brine had appointed his three children and Ms Carter, his de facto spouse, as the executors of his estate. Professor Brine had two super accounts/pensions in the same industry super fund. As one pension had no residual value and could only be paid to his surviving spouse, the dispute related to the remaining pension, which could be paid to a dependant or the legal personal representative (deceased estate). Professor Brine had completed a non-binding death benefit nomination in favour of his legal personal representative to receive this pension amount.

Ms Carter applied to the super fund trustee to receive the benefits in both accounts in her personal capacity.

Ms Carter had previously represented to the other three executors on multiple occasions that the estate was not an eligible beneficiary of the super benefits. However, after making their own enquiries, the deceased’s three children found out that they could claim the death benefit on behalf of the estate and proceeded with this claim.

The super fund trustee then exercised its discretion to pay both pension benefits to Ms Carter and the remaining executors formally disputed this decision. Due to her conflict, Ms Carter recused herself from any discussions or actions relating to the dispute notice issued to the fund trustee by the executors and did not object to it but remained an executor. Ms Carter in fact made further submissions to the trustee in her personal capacity claiming the benefits.

After the super fund trustee affirmed its decision and other dispute processes provided no further recourse, the remaining executors applied to the South Australian Supreme Court for an order that Ms Carter account to the estate for these benefits. The court found that:

  • Ms Carter was in a position of conflict regarding her duties as an executor.
  • Ms Carter’s appointment as an executor via the deceased’s will, while providing some acknowledgement by the deceased of a conflict, was not by itself sufficient to overcome her position of conflict. Rather, a specific conflict authorisation was required.
  • As the other executors claimed the super benefits on behalf of the estate and had full knowledge about their rights prior to the super fund trustee’s decision, they effectively consented to Ms Carter claiming the benefits in her personal capacity despite her conflict. From that point, Ms Carter did not act in breach of her duty as an executor as there was no connection between her breach and the benefit she received.
  • Ms Carter was not required to account to the estate.

Brine v Carter provides a particular set of facts that resulted in a somewhat incongruous outcome that allowed an executor to apply for and receive death benefits in her personal capacity despite a potential conflict arising. The court noted that had the other executors not been aware of Ms Carter’s application, and had they also not made an application on behalf of the estate, Ms Carter would have been liable to account to the estate. This outcome was therefore due to the particular facts in this case. In many other factual scenarios, the conflict could easily have resulted in the spouse having to account to the estate.

Burgess v Burgess – sacred trustee obligations

In Burgess v Burgess [2018] WASC 279 Mr Burgess died without leaving a will in May 2015 and was survived by his wife and two minor children. A year after his death, Mrs Burgess applied to become administrator of his estate and was appointed on 27 June 2016.

Mr Burgess had super benefits in four large public offer funds and Mrs Burgess made a claim to two of those funds to be paid her deceased husband’s death benefits. She applied for and received benefits from one fund prior to her appointment as administrator and applied for and received benefits from another fund after her appointment.

Mr Burgess’ estate (including any super paid to the estate) would be split among Mrs Burgess and their two young children. By the time of hearing, one super fund had paid benefits to the estate. The fourth fund had not yet made any payment and Mrs Burgess had not made any application to it. Further, there were no BDBNs in place in relation to any of the funds.

Due to the uncertainties, Mrs Burgess herself made an application to the Western Australian Supreme Court. Ultimately, the court followed the principles in McIntosh and found that:

  • Mrs Burgess would retain the benefits from the first super fund, as she was not an administrator at the time of application and thus no conflict had arisen in relation to the first fund.
  • Mrs Burgess was required to account to the estate for the benefits applied for and received after she was appointed. There was a conflict of interest and as administrator she was bound to claim the benefits on behalf of the estate after she was appointed administrator.
  • Mrs Burgess was bound to claim the remaining super benefits on behalf of the estate.

The court’s comments in Burgess demonstrate the strict fiduciary obligations placed on an executor or administrator. Martin J explained Mrs Burgess’ obligations at para [84] as follows:

In an age of increasing moral ambivalence in western society the rigour of a court of equity must endure. It will not be shaken as regards what is a sacred obligation of total and uncompromised fidelity required of a trustee. Here, that required the administrator not just to disclose the existence of the (rival) estate interest when claiming the superannuation moneys in her own right from the fund trustee. It required more. It required her to apply as administrator of the estate for it to receive the funds in any exercise of the fund trustee’s discretion.
[Emphasis added]

Martin J gave the following comments at para [85] regarding the fiduciary duties of an executor:

The interests of a deceased estate require a ‘champion’ who cannot be seen (even if they are not) to be acting half-heartedly, or with an eye to achieving outcomes other than an outcome that thoroughly advances the interests of the estate – to the exclusion of other claimants.

Martin J made the point that the undesirable outcome in this case might have been avoided had Mr Burgess made a will that explicitly contained a conflict authorisation or if he had signed BDBNs in relation to his super benefits. In lamenting the outcome Martin J at para [91] stated:

The result is, of course, messy for the family and less clear cut than might otherwise have been desired. However, that is a result of wider trustee integrity policy principles of the law which take effect and prevail. They are of vital importance and are applicable to universal circumstances extending well beyond the present rather regrettable factual situation. The present is a situation, I reiterate, that might have been avoided by the two measures I earlier mentioned.

Other important cases

In the case of Re Narumon [2018] QSC 185 the court considered whether attorneys under an enduring power of attorney (‘EPoA’) could validly execute both a BDBN confirmation/extension as well as a new BDBN on behalf of a member. Whether an attorney will have such power will depend on the SMSF governing rules, the EPoA document, the relevant powers of attorney legislation in the applicable state/territory and the federal superannuation legislation.

In Re Narumon the member (Mr Giles) became incapacitated and his attorneys under an EPoA, his wife (Mrs Giles) and his sister (Mrs Keenan), purported to both extend a prior lapsed BDBN and to execute a new BDBN, both of which provided for death benefits to be paid to them. The EPoA document did not expressly authorise the attorneys to enter into a conflict transaction. The Court found that the extension of the prior BDBN was valid since:

  • the fund’s governing rules allowed the prior BDBN to be confirmed and provided that any power or right of a member could be exercised by an attorney;
  • while the EPoA document did not expressly deal with superannuation matters, the meaning of ‘financial matters’ in the relevant (Queensland) legislation was wide enough to cover superannuation; and
  • while a ‘conflict transaction’ entered into by an attorney can invalidate a transaction, the confirmation of the prior BDBN was not a conflict transaction. While the BDBN benefited the attorneys it was found not to amount to a conflict as it simply ensured the continuity of Mr Giles’ prior wishes.

However, the new BDBN executed by Mrs Giles and Mrs Keenan was found to be a conflict transaction as it provided for a different payment of death benefits which slightly benefited Mrs Giles more than the extended BDBN. Thus, the new BDBN was invalid. For a detailed analysis of this case and its lessons click here.

In the case of Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65 the deceased’s daughter, who was also a co-trustee, was ordered to repay death benefits back to the fund and was removed as a trustee along with her co-trustee husband for acting ‘grotesquely unreasonable’ in conflict of her trustee duties and in bad faith. This case explores the high legal standards placed on SMSF trustees and highlights the need for careful attention to SMSF succession planning. For a detailed analysis of this case and its lessons click here.

SMSFs

It is important to consider the impact of these cases from an SMSF perspective as it is typical for the spouse of a deceased SMSF member to also be an executor or administrator of that member’s estate. In such a situation, a potential and real conflict may arise between the executor/administrator’s obligations as trustee of the estate and their desire to receive superannuation death benefits in their personal capacity.

These cases reiterate the importance of planning for death and SMSF succession. In all cases, the conflict difficulties would likely have been avoided had the deceased had a will with appropriate conflict authorisations and/or BDBNs were in place to remove the trustee’s discretion as to whom death benefits could be paid.

In any super death benefits matter, advisers and trustees should ensure that applications to receive benefits are not made without first considering, among other things, the possible conflict implications. Moreover, advisers should recommend that their clients proactively implement SMSF succession and death benefit strategies that ensures the surviving spouse is not placed in a position of conflict that could undermine their ability to receive their spouse’s death benefits. This might involve special provisions in wills, EPoAs, BDBNs, death benefit deeds and other legal documents.

Conclusion

This line of cases illustrates that the courts treat the fiduciary duties of an executor/administrator in a strict and ‘sacred’ manner. Further, the courts will uphold these obligations despite what might be seen as a strict and inflexible approach resulting in an ‘unfair’ outcome.

DBA Lawyers is well placed to advise and document succession strategies to overcome these risks. We offer, among other services:

  • Succession planning advice
  • BDBNs
  • Death benefit deeds
  • Constitutions with successor directors
  • SMSF deeds with numerous succession strategies

For an article on succession planning strategies click here.

Without proper prior planning, SMSF members could be left with conflicts, resulting in substantial time and cost hurdles in the event there is any dispute.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

2 March 2019

Grotesquely unreasonable and SMSF trustees paying death benefits: Re Marsella

28 February 2019

By Daniel Butler, Director, and Kimberley Noah, Lawyer, DBA Lawyers

The decision in Re Marsella [2019] VSC 65 (‘Re Marsella’) highlights the importance of trustees of self managed superannuation funds (‘SMSFs’) exercising their discretion to pay death benefits in good faith, with real and genuine consideration and in accordance with the purpose for which their power was conferred.

This case is a wonderful read and has a great depth of legal analysis of the high legal standards that SMSF trustees are held accountable to. This case also highlights the need for careful attention to SMSF succession planning.

Facts

The Swanston Superannuation Fund (‘Fund’) was established by deed on 12 May 2003 (‘Deed’) with Helen Marsella (‘Deceased’) and her daughter from her previous marriage, Caroline Wareham (‘Caroline’) as individual trustees. The Deceased was the sole member and founder of the Fund until her death on 27 April 2016 and her Fund balance was then an estimated $450,416.

The Deceased was also survived by her husband of 32 years, Riccardo Marsella (‘Riccardo’).

Clause 8.5 of the Fund’s Deed provided the founder with the power to appoint and remove any person as an individual trustee, conditional on the approval of a members’ resolution. This clause also provided that an individual ceases to hold the office of trustee upon death.

The dispute

In response to the exercise of discretion and payment of death benefits in favour of Caroline, Riccardo, both in his personal capacity and as executor of the Deceased’s estate, sought the removal of Caroline and her husband Martin Wareham (‘Martin’) as trustees. As discussed later, Riccardo was successful in this regard. Additionally, Riccardo sought the appointment of a new trustee and the repayment of the death benefit plus interest to the Fund.

Riccardo submitted that the trustees did not exercise good faith and real and genuine consideration in relation to the dependants of the Deceased and submitted that the death benefit payment should be set aside.

The trustees submitted that the Deed afforded them with an absolute and unfettered discretion to make the payment to Caroline, arguing that they were not required to provide reasons for their decision. Further, the trustees submitted that under the Deed, the trustees had a general power of appointment, which was tantamount to ownership, and for that reason, Caroline could distribute the entire Fund balance to herself.

Questions for the Court

The key questions for the Court were:

  • whether Caroline and Martin properly exercised their discretion when paying the Deceased’s death benefit. Specifically, the Court considered whether the trustees acted in good faith, with real and genuine consideration and in accordance with the purposes for which the power was conferred; and
  • whether Caroline and Martin should be removed as trustees and the appointment of a new trustee.

Outcome

McMillan J held that Caroline and Martin in their capacity as trustees failed to exercise their discretion with a real and genuine consideration of the interests of the Fund’s beneficiaries.

In particular, the Court singled out Caroline’s behaviour for criticism, stating at [56] that her arbitrary distribution of benefits in the Fund to herself was carried out with ‘…ignorance of, or insolence toward, her duties.’ McMillan J at [57] also stated that her conduct was beyond ‘mere carelessness’ or ‘honest blundering’. Consequently, McMillan J held that Caroline and Martin were to be removed as trustees commenting at [79]:

In the context of an improper exercise of discretion, and significant personal acrimony between the first defendant and plaintiff, the defendants are to be removed as trustees of the fund.

Subsequently, McMillan J held that Riccardo was to file further submissions for the appointment of a trustee to ensure the Fund meets the definition of a complying superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth).

Key lessons

Many implications arise from the decision of Re Marsella.

Lesson 1 — Trustees must exercise their discretion with good faith, etc

This case highlights the importance of good faith, etc, in regard to the exercise of a trustee’s discretion in relation to paying death benefits.

In April 2017, the Fund’s accountant Mr Hayes received two sets of trustee minutes of meetings and resolutions, both dated 17 April 2017 prepared by the trustees’ lawyers.

The court closely examined the documents and communications prepared by the trustees’ lawyers.

These communications counted against Caroline on the question of good faith, as the court found that correspondence provided to Riccardo via her lawyers evidenced a ‘dismissive tenor’ and was approached with ‘…misapprehensions as to the terms of the fund deed…’

The first set of trustee minutes dated 17 April 2017 named Caroline as the sole surviving trustee and resolved that the trustee exercise its discretion to pay her the entire balance in the Fund. These minutes also indicated that due consideration had been afforded to the interests of all of the dependants and to any beneficiaries of the Deceased including her legal personal representative (ie, the executor of her estate).

Interestingly, a second set of trustee minutes was also made on 17 April 2017 noting that clause 8.1 of the Deed required the office of trustee be held by two or more individual trustees and noted that the appointment power could not be exercised as the Fund had no members and accordingly, a member resolution could not be made to appoint another trustee. The second minutes indicated that Caroline could however appoint a co-trustee by reliance on s 41(1)(b) of the Trustee Act 1958 (Vic) (which broadly applies if there is otherwise no other person willing or able to act as trustee). Relying on s 41(1)(b), Caroline appointed Martin as co-trustee to satisfy the requirement in the Deed to have a minimum number of at least two trustees.

Moreover, the second set of minutes also provided that together, Caroline and Martin resolved to distribute all of the Deceased’s balance in the Fund to Caroline. These minutes also used similar language to the first set of minutes indicating that due consideration had been given prior to the resolution to pay the whole of Fund’s balance to Caroline.

The court was suspicious that there were two sets of trustee minutes on the same day (both dated 17 April 2017) and especially that Martin had only been appointed on that same day as a co-trustee resolved to approve the payment to Caroline.

McMillan J noted Karger v Paul [1984] VR 161 at [164], holding that the discretion must be exercised in ‘good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred’. Generally the Courts will not look at the outcome itself, but where the result is, in the words of McMillan J at [51] ‘grotesquely unreasonable’, this may form evidence that the discretion was not properly exercised or was mala fides.

Further, McMillan J reiterated the approach quoted by the High Court in Attorney-General v Breckler (1999) 197 CLR 87 at [99]-[100]:

‘[w]here a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor, or without giving a real or genuine consideration to the exercise of the discretion. The exercise of a discretion by trustees cannot of course be impugned upon the basis that their decision was unfair or unreasonable or unwise. Where a discretion is expressed to be absolute it may be that bad faith needs to be shown.’

Accordingly, McMillan J held that the question of whether a trustee acted in good faith, with a real and genuine consideration will turn upon the considerations and inquiries the trustee made, their reasons for, and manner of exercising their discretion.

Indeed, all trustees must inform themselves before making a decision to ensure the discretion is exercised with a real and genuine consideration for the purpose for which the discretion was conferred. As a corollary of this principle, trustee must not take irrelevant considerations into account and must not fail to take relevant considerations into account. In this case, the court noted at [52] that Caroline’s purported good faith was impugned by her ‘…ignoring the plaintiff’s substantial relationship with the deceased and relatively limited financial circumstances…’ which were relevant considerations.

Accordingly, advisers must remember that although a trust deed may, among other things, afford a trustee with absolute discretion, the discretion must still be exercised in good faith and with due regard to relevant considerations.

Lesson 2 — Trustees must exercise their powers in accordance with the purpose for which the power was conferred

Trustees must also carefully exercise trust powers in accordance with the purpose for which these powers were conferred. This is a question of fact that is decided having regard to the overall circumstances and evidence, as McMillan J held at [40]:

Whether a trustee exercised a power for a proper purpose is a question of fact to be decided on the evidence. A trustee is not bound to disclose her or his reasons in reaching a particular decision, and a negative inference cannot be drawn from the non-disclosure by a trustee of the reasons for his or her decision.

In this case, McMillan J held that additional evidence would be required to demonstrate that Caroline and Martin had exercised their discretionary power for an improper purpose, as Caroline fell within a designated class of beneficiaries that are the subject of the power under the terms of the Deed.

Lesson 3 — Trustees must not act in conflict of their duty

This case considers a number of issues relating to conflict, particularly where personal conflicts and relationship breakdowns arise that preclude trustees from exercising their duties impartially and as part of the proper administration of the trust. The court found that significant personal acrimony existed between Caroline and Riccardo that impacted her ability to discharge her duties as trustee and that the Deceased did not foresee and consent to such a conflict merely by virtue of appointing Caroline as a co-trustee at the inception of the Fund.

In this case, the trustees’ lawyers sought to deny that a conflict had arisen, however McMillan J rather characterised this downplaying of the conflict as ‘ignorance or deliberate mischaracterisation of the true circumstances at hand’ at [50], holding that a substantial conflict did, in fact, exist between Caroline and Riccardo.

Moreover, McMillan J held that the overarching obligations of trustees applied to the exercise of discretion in relation to death benefits. Relevantly, McMillan J held at [47]:

The fact that [Caroline] falls within the class of objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for the purposes for which the power was conferred.

This aspect of the case is significant as it illustrates how easily conflicts can arise in an SMSF context. ATO data indicates that approximately 70% of funds are two member funds, and these are likely to predominantly involve married couples and upon the death of the first spouse, it is very likely that the surviving spouse may be placed in a position of potential conflict in relation to their trustee role. If these foreseeable conflicts are not appropriately managed, many SMSFs that become managed by the surviving spouse following the death of their spouse could stray into breaching their fiduciary duties.

Lesson 4 — Importance of seeking advice

This decision demonstrates the importance of seeking independent, specialist legal advice where there is any uncertainty.

McMillan J noted in Re Marsella that the Fund failed to obtain specialist legal advice, even though this was recommended by the Fund’s accountant and notwithstanding that the trustees had obtained certain legal advice. McMillan J specifically noted at [55] that Caroline ‘did not seek to resolve uncertainty surrounding the fund deed, in the context of a significant financial decision…’ and that specialist legal advice was particularly important given the complexities and size of the Fund.

Accordingly, where there is any doubt whatsoever regarding a fund’s document trail or related matters, including how a trustee should exercise its discretion, these critical points must be addressed before a trustee is in a position to properly exercise its discretion. Therefore, advisers and SMSF trustees should seek independent specialist legal advice as soon as possible to properly address these matters.

(Naturally, DBA Lawyers, as well as being recognised as the leading SMSF law firm in Australia, offers independent expert legal advice. Our advice is also subject to legal professional privilege.)

Lesson 5 — Planning for control after death

This case highlights the importance of sound succession planning. Indeed, the succession to control of an SMSF is critical to ensure a fund is properly managed on the loss of capacity or death of a member. Unless the fund is placed in trusted hands, particularly where there are second or subsequent spouses, the member’s wishes and intentions may be ignored. There have been numerous death benefit disputes involving SMSFs where the second spouse has taken control of the SMSF for their own benefit on the death of their spouse. In contrast, this case involved the surviving trustee, being the Deceased’s daughter, seeking to take control of the fund to the detriment of the second spouse.

We note that with appropriate succession planning and quality documentation (including, among other things, a BDBN or death payment deed) may have overcome the issues in this case.

DBA Lawyers believes there are very few SMSF deeds that appropriately and adequately deal with succession and what happens on loss of capacity or death. Indeed, if an SMSF deed is not appropriate the trustee should urgently consider updating to a quality deed.

Conclusions

There are limited grounds to review a trustee’s exercise of discretion and the courts are reluctant to interfere with the exercise of discretionary powers unless there is clear evidence. This case demonstrates that the courts are willing to set aside trustee decisions and remove trustees where they have failed to act in good faith and fail to comply with their trustee duties.

In light of this decision, SMSF trustees should consider reviewing their current SMSF succession planning to ensure there are appropriate arrangements and documents in place and seek expert legal advice wherever needed.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Labor ban hits small investors hardest

The Australian

28 February 2019

Michael Roddan

Retirees with more than $1.6 million in self-managed super­annuation will mostly be able to dodge Labor’s ban on franking credit refunds, while savers with smaller balances will bear the brunt of the opposition’s proposal, according to consultancy Pitcher Partners.

In a submission to Liberal MP Tim Wilson’s house economics committee inquiry into the Labor proposal, Pitcher Partner super­annuation adviser Brad Twentyman said larger-balance SMSFs would still suffer a “detrimental impact” but in percentage terms those retirees would suffer a tax hit significantly less than the “30 per cent tax increase” to be felt by smaller SMSFs.

“Members in larger balance SMSFs are also more likely to be able to restructure their arrangements to mitigate the impact of the tax change,” Mr Twentyman said.

Labor has proposed to end cash refunds for excess franking credits for investors who pay little or no tax from July 1 if it wins the election — a move that is expected to increase government revenue by $56 billion over a decade.

But Mr Twentyman said the franking credit proposal would also treat large regulated super­annuation funds differently ­depending on the demographics of the fund, the percentage of fund assets supporting pensions or the taxpaying status of the fund.

The not-for-profit industry fund sector is expected to be largely insulated from the measure.

“The different tax outcomes arising for taxpayers in similar situation depending on the circumstances of the superannuation structure they are using highlights the significant underlying problems with the franking credit changes being considered,” Mr Twentyman said.

Labor frontbencher Anthony Albanese said yesterday there was a reason Australia was the only major economy to offer the ­generous tax scheme. “The idea you get a refund … of your tax when you haven’t paid any tax is not sustainable,” Mr Albanese said.

AMP Capital chief economist Shane Oliver said a problem with Labor’s proposal was many ­Australians had factored their ­retirement plans around the ­refunds.

Mr Oliver said the proposal “could be argued to remove an anomaly in the tax system as dividend imputation was designed to prevent double taxation of dividends, not to stop them being taxed at all”.

He also said it was “worth noting Labor’s proposal does not ­affect at least 92 per cent of taxpayers, who will continue receiving franking credits as they have a sufficient income tax liability — as will pensioners, who will be exempted”.

“If it sets off a broader windback of franking credits, then it would be a bigger concern,” Mr Oliver said.

The cost to the budget of the scheme has increased since it was introduced by the Howard government, when the measure cost $500 million a year.

Since then, many investors and self-managed super fund operators have shifted all their assets into equities to take advantage of the franking credit rebate.

Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.

Retirees in the crosshairs

The Australian

21 February 2019

Bernard Salt

It’s a time of reckoning for middle-class retirees who held the flawed assumption that concessions in the past would remain in the future.  Retiring boomers can expect to be mugged by reality – and ingratitude.

In 2001 I published my first book, The Big Shift, which included a thought piece I had published some years earlier. Here’s what I wrote 20 years ago: “Greedy Boomers Bleed Xers. So runs the headline … in 2021. The story proceeds, ‘The Australian president today launched a stinging attack on the now-retiring baby boom generation for what she calls its bleeding of the taxpayer after a life of self-indulgent spending. We, the X generation, are now being asked to support a bunch of bludgers,’ the president said.”

As you can see my taste for satire, which peaked with the smashed avocado brouhaha of 2016, was evident early in my writing. Plus, it’s nice to see that the term “bludgers” remains as relevant and as piquant today as it was back then. And we may not have a president today, but we have had a female prime minister, so I’m claiming this entire piece as a prediction proven.

You will immediately see the parallels with today’s debate around proposed plans to limit the payment of dividend franking credits. This is a policy designed to rein in what is being presented as generous if not unfair concessions to the mostly baby-boomer self-funded-retiree set.

It is indeed a time of reckoning for middle-class retirees who have built nest eggs and a lifestyle on the apparently flawed assumption that concessions granted in the past would be maintained into the future. Or that previous concessions would be grandfathered, meaning existing arrangements would continue to be honoured.

The president continues: “Baby boomers had it better than their kids, and certainly much better than their parents. They are the ‘spoilt generation’ who forged culture around their every whim: hippies, punks, dinks and yuppies. Now they want us to install them as WOPs (wealthy old people). Well, it’s not on. They should have provisioned better in their time. Not ours.”

I admit I was also way off the mark about generation X — born between 1965 and 1982 — being ­incensed. It’s the millennials (1983 to 2000) — the children of baby boomers (1946 to 1964) — who seem to be most aggrieved about the perceived privileges of the once mighty but now wounded baby boomersaurus.

As it turns out the Xers have been both a placid and a stoic life form. Oddly, the generation that entered the workforce in the 1990s recession didn’t complain about their lot. It’s the later-blooming millennials who are angry, including Adam Creighton, The Australian ’s economics-writing Xer-millennial cusper, who has put (and I think quite enjoys putting) the case for limiting all forms of generationally bestowed largesse.

Actually, to the growing bucket of boomer critics should be added politicians who are remarkably adept at spotting a taxation opportunity.

“The problem for baby boomers is that there is no unifying voice to argue their case. They’re scattered across the country in electorates that aren’t likely to shift an election, and are divided.”

I have an idea. Let’s have a special “fairness tax” levied on all Australian billionaires, shall we? I mean, they can’t have amassed such wealth without at least the tacit support of the Australian people and nation. And to be entirely transparent and fair, if they don’t like the proposal, they are most welcome to vote against it. All 76 of them. What do you think?

Here is the problem that well-to-do baby-boomer retirees have. There’s a lot of them and so any concessions granted in their favour are significant and expensive. This underlying logic will never change. There’s a lot of quite healthy 65-year-old baby boomers now; there’ll be vastly more quite frail (and expensive) 85-year-old baby boomers in 20 years than there are today. This equation will tempt politicians to be even bolder and even “fairer” every election for another generation. Welcome to retirement, baby boomers. .

No one complained when baby boomers were pouring en masse into the workforce in the 70s and 80s, paying taxes to governments, which spent that money on infrastructure and defence and education … but which made no provision for the retirement of the boomer-boosted worker bulge. Other than, of course, setting in place generous defined-benefit superannuation schemes for state and federal government workers, including the political class.

I guess boomers are at fault because in their 30s they didn’t hold governments of the day to account — saying, “You shouldn’t be spending money on infrastructure and health, you should be setting up a national retirement scheme for when we retire in 30 years.” Although I suspect that had boomers made this case, politicians of the day would have said, “Yeah, right, let some future administration deal with that problem; we have an election to win!”

For the record, the superannuation guarantee come into play in 1992. The first baby boomers entered the workforce as 15-year-old apprentices in 1962 and subsequently paid tax for 30 years of a 50-year career, with nothing being saved by the governments of the day for their collective retirement. That kind of lack of a safety net builds a culture of self-reliance and of frugality. Here’s the logic of that 1962 apprentice, now aged 72: Fine, I’ll look after myself, but you can’t come along after the fact and commandeer what I have fairly saved by the rules of the day.

Self-funded retirees have a problem. If the proposal to limit franking credits is rewarded with success at the upcoming election, it will merely confirm the logic that they are fair game. All that scrimping and saving and self-denial; all the principles of effort-and-­reward that boomers learned from their Depression-raised parents, is diminished, and not just in terms of monies lost.

It’s the idea that a lifetime’s sustained effort and frugality is no longer rewarded by a me-me-me society that cannot remember a recession of double-digit unemployment or of a time when interest rates topped 18 per cent. It’s more than money. It’s putting your heart and soul into a place, into a country, over a lifetime with an eye to retaining your dignity and your pride through self-sufficiency in retirement. And then discovering late in the game that the social contract on which you have built your life, your savings, your sense of pride, your independence, can be whipped away.

And not only whipped away but quite reviled by an ascendant zeitgeist for supposedly having unfairly garnered more than your fair share. Baby boomers will say they have worked hard, they have paid all required taxes at every stage of their lives, they raised families and scrimped and saved to buy a house, and on top of all this they will also say that they have provisioned for their own retirement. This isn’t an issue of money. This is an issue of the kind of society we want for our nation. Do we want to encourage self-reliance and resilience and pride in work whereby the efforts of a lifetime are protected, or are at least respected? Or do we want a society where the underlying ­social contract can be changed at any point in the future? And for such changes to be made by a political class whose own retirement is assured by an uncommon level of generosity?

It doesn’t seem fair to self-funded retirees. They are upset.

The problem for baby boomers is that there is no unifying voice to argue their case. They’re a disparate lot scattered across the country, in electorates that aren’t likely to shift an election, and are divided among themselves.

Some self-funded retirees agree that past concessions have been too generous. The problem isn’t so much with well-to-do self-funded retirees losing concessions, it’s the barely rich.

It’s the private-sector worker who has worked and scrimped and saved and who has taken pride in being independent. It’s the worker whose big plan for retirement is to look after grandchildren and to spoil them a bit, to help out their kids a bit, to go around Australia in a campervan, or to take a single “big trip” to Europe and to come back declaring that Australia is the best place on earth.

It’s hardly a glamorous lifestyle.

But it has taken hard work, sacrifice and belief in a social contract with the Australian people to achieve. We will work hard. We will provide for our own retirement. We will make the required sacrifices. But we need you to keep your side of the bargain and either maintain the social contract on which our retirement planning has been built, or at the very least honour existing arrangements.

I think baby boomers — or at least self-funded retirees — would say, “We get that if there’s a war or if there’s a recession then sacrifices need to be made by the collective. But these are prosperous times — unemployment is at a record low, employment growth is strong. This is a shift in the social contract and it’s unfair. “

Bernard Salt is managing director of The Demographics Group and is not planning to retire anytime soon.

Darwin, Northern Territory

Retirees Ken Moffitt (66, retired financial-software consultant) and Sue Moffitt (69, retired head of a luxury travel business) say, ‘They (Labor) think they’re going to get the rich, but they’re not. They’re going to get all the people in the middle who’ve worked hard and saved hard to provide for their retirement — to give themselves independence from government handouts.’ – Ken Moffitt

‘What I can’t abide is the discrimination’

When Ken and Sue Moffitt retired in their mid-50s a little over a decade ago, they thought they had enough money in their self-managed super fund to last a lifetime.

The couple sold their Sydney home and businesses to pay for a camper-trailer and four-wheel-drive and set off on a five-year dream trip around Australia, before finally settling in Darwin.

If Labor’s proposed superannuation changes become law, Ken says he and his wife will have to “die six years earlier”, or begin claiming a government pension to cover their expected losses.

“I could swallow the loss of money if everyone was treated equally,” he says. “What I can’t abide is the discrimination: people in the exact same (financial) circumstances are being treated differently. I find that un-Australian and very unacceptable.”

The couple has about $1.7 million in joint fund earning around $13,000 in franking credits annually.

Ken estimates Labor’s changes will cut the fund’s total yearly income by up to 30 per cent but says franking credits contributed 15 per cent of its income in 2016-17.

Sue says the only alternatives to relying on government handouts are restructuring their portfolio with riskier assets or reducing their standard of living.

“Why should we have to when we worked for (a combined total) of 60 years and planned for our retirement?” she says. “It’s really, really annoying, frustrating and ridiculous.”

She ran a luxury travel business tailoring itineraries for wealthy clients while her husband consulted to large companies about financial software. They have godchildren who they “spoil rotten”, but no children of their own.

Experts have warned Labor’s proposed changes are unfair because someone with the same assets as a self-managed retiree would still receive franking credits if they held those assets via an industry fund.

On arriving in Darwin, Ken helped establish the Association of Independent Retirees to help others manage their savings. Some of those affected by Labor’s policy could move their money into industry funds, while others might take extra risk and potentially “shoot themselves in the foot”, he says.

More still could burden the pension system. The combined superannuation, capital-gains and negative-gearing policies could “profoundly impact” markets.

“The problem we’ve got is that I now no longer have the capacity to make up the difference,” Ken says. “They (Labor) think they’re going to get the rich, but they’re not.

“They’re going to get all the people in the middle who’ve worked hard and saved hard to provide for their retirement — to give themselves independence from government handouts. The rug has just been pulled out from underneath them.” While critical of the Coalition’s past modifications to “taper rates”, Ken puts Labor’s policies in a different league. “I don’t think anybody truly understands the ramifications of what’s going to happen,” he says.

Labor could make its plan more palatable by capping “excess” franking credits for everyone and correspondingly curtailing generous defined-benefit pension schemes.

Although a Coalition-leaning voter, Ken says he is not a member of any party. Labor’s changes will not cause him to join, but he might independently canvass people.

“I feel probably more political now than I have at any time before in my life,” he says.

Helensvale, Queensland

John Cadzow, 68, former construction site supervisor and Rhonda Cadzow, 64, former office administrator.

They will lose about $15,000 a year — about 15 per cent of their income — under Labor’s proposal.

“At some stage in the future we will rely on government handouts. At the stroke of a pen, our retirement plan, worked towards as paying taxpayers, is null and void.”– Rhonda Cadzow

Tweed Heads, NSW

Vicki Fitzgerald, 60, former accountant and Peter Fitzgerald, 64, former general manager at the Australian Securities Exchange.

The Fitzgeralds will lose 30 per cent of their income and will eventually be forced to take a part-pension under Labor. The residents of the marginal seat of Richmond say they will vote against Labor for the first time.

“You make plans, save money, put money away and try and get a balance that you can live on and you do that based on the rules of the day … We believed Paul Keating when he told us to save for the future because there would not be enough taxpayers to fund pensioners when we retired.” – Peter Fitzgerald

Wesfarmers boss Rob Scott cites franking credits in warning on tax policies

The Australian

21 February 2019

Eli Greenblat – Senior Business Reporter

Wesfarmers chief executive Rob Scott has cautioned both sides of politics against policies that crimp household disposable income, just as consumers face pressure from stagnant wages growth, rising costs of living and tighter access to credit.

Mr Scott said that while the ALP’s policy to remove excess franking credits on shares was “not the end of the world”, these tax refunds were relied upon by many Australians to fund their retirement.

The boss of a company which owns leading retail chains such as Bunnings, Kmart and Target said politicians must be mindful about cost pressures facing consumers in the lead up to the election, and not make things worse by further strangling incomes.

“We will start to hear in coming months about a range of policies from all political parties and I guess what I am saying is it is very easy to look at one policy in isolation, but I think it’s important we consider the impact of a number of different policies,’’ Mr Scott told The Australian, as Wesfarmers unveiled its latest profit result for the December half.

“So there is a whole lot of policies relating to tax, obviously franking credits, and I think we just need to be mindful at a time when consumers are under a bit of pressure, cost of living increases, real wages growth has been relatively modest, concerns around housing and access to credit, I think now is the time that when setting policies we should be mindful about the impact it can have on consumers and the impact it will have on business investment.’’

Proposed Labor tax policies include raising $60 billion over 10 years by eliminating excess franking credit refunds as well as scrapping negative gearing.

The Coalition argues Labor’s policies will damage the Australian economy and that

$200 billion in new taxes will dent consumer spending and constrict business investment.

“Those opposite have a plan for $200 billion of new taxes, including a big new housing tax,” Treasurer Josh Frydenberg told parliament last week, as the government warned of the impact new charges could have on personal incomes and the wider economy.

Labor’s franking credits policy has become a key election battleground, with the government arguing as many as 800,000 retirees could suffer financially if cash refunds for excess franking credits are axed.

Mr Scott said that while the market would adjust to the franking credits scheme, he agreed that Australians who rely on franking refunds for income – mostly retirees and pensioners – would see their disposable income fall.

“I think it’s important to note that before 2000 this (excess franking) refund wasn’t available so at end of the day the market will adjust and we will adjust, and franked dividends will continue to be of great value for a majority of shareholders.

“So I guess in terms of the policy, in isolation I don’t think it is the end of the world, but I think what needs to be considered is the policy in the light of a whole lot of other policies that could dampen consumer spending, because clearly there are number of people who rely on those credits, that is part of their income and influences spending.

“I wouldn’t get too hung up on that policy in isolation, but we need to consider the broader set of policies and what impact it might have on household spending going forward.’’

Mr Scott said election promises needed to be viewed through any potential threat to the household budget, with consumers already feeling the strains of rises in cost of living expenses.

“I think at a time when the consumer is particularly cautious and facing some challenges in terms of managing their budget, we need to be mindful the impact of any policy changes are going to make their lives even harder, and I think that is stating the obvious.’’

Kelly O’Dwyer’s Valedictory Speech to Parliament

20 February 2019

Ms O’DWYER (Higgins—Minister for Women and Minister for Jobs and Industrial Relations) (16:34): on indulgence—I start today with the words that concluded my very first speech in this place:

I will never forget that politics is about people and that people can make a difference. That is why I am here. I look forward to playing my part in building an even better Australia …

Going on a decade as the federal member for Higgins, I believe that I have been able to do that.

As anyone who has had the honour of serving in this place knows, you cannot make a contribution in this place without a lot of support. I want to start by thanking the people of Higgins for the privilege of representing them in this place and for entrusting me to represent their issues, both big and small. I especially want to thank them for giving me the opportunity to share in important moments in their lives and those of their families.

I also want to thank the extraordinary members of the Liberal Party. I joined the Liberal Party as a 17-year-old because I believe that people should be free to choose their own paths in life—that they should be rewarded for their hard work and enterprise

—and that everyone, regardless of background or circumstance, deserves respect and the opportunity to live their best life. Thank you for giving me the opportunity to prosecute those values in this place. I have been extremely fortunate to have such a strong electorate conference executive, led so brilliantly by my good friend Mark Stretton, who is here today with his beautiful family. I’m grateful to them, as well as every member of my hardworking committee.

I feel the same debt of gratitude to the Chairman and patrons of the Higgins 200 Club and their families during my time here—Peter Bartels AO, the Hon. Peter Costello AC and current chairman, Richard Murray. Each has been a source of thoughtful advice and wonderful friendship. Peter Costello has also been a great mentor and a terrific example of integrity in political life. And while we haven’t always agreed on everything, I am the better for our robust discussions. I look forward to many more in the years ahead.

I want to place on record my sincere thanks and appreciation to the hundreds of volunteers, supporters and friends who have backed me with their time, money and expertise over four elections. In particular, I want to thank Andrea Coote, a Higgins Liberal powerhouse, who has helped direct each of my campaigns. The people, though, on the frontline each and every day are the people who work for you. And some, like the brilliant Sarah Nicholson and Tania Coltman, have been on the journey with me from the very beginning.

Working in politics is more than just a job. It is a vocation. Like us, our staff want to serve their community and their nation and change lives for the better. The expectations and pace is unrelenting, and the sacrifices demanded of them and their families are very real. I have had the good fortune to work with the very best team in the country—

people who are caring, bright, intellectually curious, loyal, hardworking and determined and who go above and beyond because they believe in our common Liberal cause.

Amongst them are women and men who I hope will serve in this place or the other. I say to each of them and their families a heartfelt thankyou—you enrich the fabric of our nation, I cherish your friendship and I look forward to celebrating your many personal and professional achievements in the decades to come.

Anyone who knows me knows that family means everything to me, and without them I wouldn’t be here. I’m joined today by my loving parents, Karen and Dan, who instilled in me a strong moral compass that has always been my guide. My colleagues can blame them for my forthright manner, because they taught me from a young age that you have a responsibility to communicate your view clearly, no matter how difficult and no matter the cost, and that above all else you must be true to yourself.

Two of my wonderful siblings are also here—my sister Kate and my brother, Tom, who together with my sister Nicki, who is overseas, are the very essence of tolerance, loyalty and love. I look forward to spending more time with them and their partners, along with my gorgeous and clever nieces, Lily, who is here today, Izzy, Lara and Charlie.

I met my husband, Jon, 24 years ago at university, and I am so glad that we are on life’s journey together. I have relied on his advice, his reservoir of love and understanding, his truth telling, his great intellect and his selfless devotion to our family. Jon works part time and is the primary caregiver in our family, ferrying children to child care, kinder and all manner of other things. He twice took extended paternity leave so that I could serve in cabinet and parliament and breastfeed our children. Whilst Jon trained as an engineer and a lawyer, I think he now sees his core competency as logistics. He is, quite simply, a great man, wonderful husband and brilliant father, and I just love him to bits.

There is no doubt, though, that our greatest achievement in life is our two beautiful, happy, confident and loving children, Olivia and Edward. Livvy and Edward, you make my heart sing, and I love you more than words can express. There is nothing that gives me greater joy than being your mum.

From the outside, politics can look like a brutal business—and it can be. There is a ferocity and urgency that is a permanent overlay to everything that is said and done here, because politics affects everyone, because the decisions made in this place affect the choices and opportunities of millions of Australians and the sort of Australia that we are and that we might become. In the battle of ideas, robust debate is critical and accountability for decision-making essential. Those who serve here have a responsibility to think deeply about the challenges that we face as a nation. Today I want to reflect on four themes that have dominated my thinking and my approach as a backbencher and minister.

The first is the intergenerational bargain. I believe that each generation has an obligation to try to put the next generation in a stronger position than the one they inherited, or, at the very least, to make sure that they are no worse off. That is why I chaired an inquiry into foreign investment and residential real estate as a backbencher. It is why I have championed key infrastructure projects like the Melbourne Airport Rail Link and the congestion fund as a member of the Expenditure Review Committee. These are essential reforms aimed at increasing the supply of more affordable housing for all Australians. The intergenerational compact is why, as a member of the ERC, I am proud to have played my part in containing spending growth and returning the budget to surplus, in the face of an obstructionist Senate, so that we can get on with paying down Labor’s debt legacy. Labor’s budgets, and the trajectory they established for future years, were quite simply an enormous exercise in intergenerational wealth transfer from our children and our grandchildren to us. It is wrong to expect the next generation of Australians to fund a higher standard of living for us than they can ever reasonably be expected to achieve for themselves, yet this is a direct consequence of a spend-now

pay-later philosophy. This is exacerbated further when you consider the ever-diminishing ratio of working-age Australians to fund the growing expenditure of an ageing population.

Given all this, as Assistant Treasurer and later as Minister for Revenue and Financial Services, I realised it was important to make modest tax changes to broaden our overall income tax base and put superannuation on a sustainable footing. It wasn’t popular amongst all of my constituents and divided opinion amongst sections of my party’s membership, but it was the right thing to do, and I am grateful to the Liberal party room for unanimously endorsing our final package. (Highlight & underline by SOS). After all, how could it be right that a young person on average earnings, with a substantial HECS debt, faced a higher tax bill on the interest earned on their home deposit savings than a person who owned their own house, had a free university education and was paying no tax on the income earned from millions saved in superannuation? We must never forget that in this place we have a dual responsibility, both to the voters of today and to those that economic historian Niall Ferguson so eloquently describes as ‘as yet too young to vote or as yet unborn’.

The intergenerational compact demands that we be fair to both.

That leads me to the second theme I want to touch on: fairness. Fairness is more than a one-word slogan hijacked to denote the redistribution of income. It has many dimensions. We must always ask the questions: fair to who and fairer on what measure? Those who choose to work harder and longer deserve to be rewarded. Those who put their capital on the line to invest in new enterprises that create jobs should have the opportunity to see the fruits of their efforts. Government tax policy that smothers initiative and enterprise and deters risk-taking and hard work is inherently unfair. This is why, together with the Prime Minister, I am proud to have contributed to legislated tax cuts for small and medium-sized businesses and tax cuts for individuals that will see the 37 per cent tax rate eliminated altogether. Our upper personal income tax rates are still too high, though, and our top marginal tax rate kicks in at too low a level. As our budgetary position improves over time, I hope that both of these issues are addressed.

Equally, it is absolutely not fair for some to treat their tax obligations as optional. If profit is earned in Australia, it must be taxed in Australia. Failing to close loopholes and enforce the law can cheat Australians of vital services and infrastructure and can mean higher taxes for those who do the right thing. I am proud to have closed loopholes that allowed multinationals to try to avoid their tax obligations, doubled penalties on large companies ripping off the taxpayer, strengthened the Australian Taxation Office and established the Tax Avoidance Taskforce. As a result, around $7 billion has been collected from large corporations, multinationals, private groups and wealthy Australians. In response to the MAAL, around $7 billion in sales income is being returned to Australians each year, plus hundreds of millions of dollars in GST revenue. Just this week, my whistleblower protections for those who expose corporate and tax misconduct were finally legislated. I’m also proud to have commissioned the first comprehensive review of the black economy, which is estimated to cost our economy up to $50 billion a year. Tackling the black economy will reduce the tax burden on everyone. Budget announcements last year have demonstrated our progress, but it is clear that there is more to do.

The third issue I want to touch on is the role of women in our society and economy, and the perennial work-life struggle. We sell ourselves short as a nation if we don’t maximise the talents and expertise of both halves of our population. There should be no limit on what girls and women can aspire to and no limit on what they can achieve. As a feminist, I have always believed that girls and women deserve an equal stake in our society and our economy. We want women to make choices that are right for them and right for their families. Choice is a good thing. But we must also be mindful that a choice today can have long-term consequences. So that means that we need to have better pathways back into work after having children, more flexible work arrangements to accommodate family responsibilities and more affordable childcare arrangements. In essence, it means helping women to build their financial security.

It also means giving men more flexibility in work to take on caring responsibilities.

Men love their children and want to be part of their lives, and children love their fathers. Yet the number of men who work part-time remains well below that of women, and I call this the flexibility gap. We need to normalise flexibility for men and ask, ‘What are the barriers? Should we have a target?’ We began work on this area during my time as Minister for Women, and I encourage my successor to continue it.

I’m proud to have delivered the inaugural Women’s Economic Security Statement, with over $100 million dedicated to help build women’s financial security through practical actions that boost their skills and employability, smooth their return to work, help them to establish their own businesses, and improve their economic recovery following critical life events such as family separation or domestic violence. I hope future governments commit to this important annual statement to keep a strong focus on gender equality.

I was pleased to announce funding for the first ever national inquiry into sexual harassment in the workplace and introduce legislation to enshrine minimum standards in the workplace for family and domestic violence leave. I’m glad this passed with the support of the whole parliament.

In my party, I’m proud to have instigated the Enid Lyons Fighting Fund to give extra financial assistance to women fighting elections. We need more of them to succeed. I hope the example of female trailblazers in this place since Federation, as well as my own lived experience, demonstrate to women contemplating public service that you can have a family, serve at the highest levels and make a serious and lasting contribution to your country. My decision not to recontest is a very personal one, and simply reflects, after four elections, a shift in my priorities.

The intergenerational bargain, fairness and women’s issues all animated me before I came into this place. I never imagined that I would see them intersect in what many consider to be one of the driest policy areas—superannuation. I said in my first speech:

We face big challenges, and I will not duck the task of tackling those challenges.

Reforming the superannuation industry has been one such challenge. Workers are mandated by government to defer 9.5 per cent of their wages today to save for their retirement. The system has seen our national savings pool grow to $2.8 trillion, which is a great achievement.

We want to encourage people to be self-reliant in retirement—that is a good thing— yet, when I came to the portfolio, some Australians were unable to take full advantage of concessional contributions because of their work arrangements. We fixed it through reforms to deductible personal contributions so that everyone benefits. I was also particularly concerned to ensure women and men with career interruptions weren’t denied access to the benefit of tax concessions for their years out of the workforce. We enacted catch-up contributions to address this. We also acted to ensure low-income Australians were not paying more tax on their mandated superannuation contributions than on their take-home pay. Our measure now benefits more than three million Australians, including around 1.9 million low-income women, to the tune of around half a billion dollars each year. These reforms all improve the system.

But there remains a deeper problem. Millions of Australians have been cheated of billions of dollars in their retirement savings. Young people have seen their accounts drained to zero through multiple accounts, multiple sets of fees and multiple insurance premiums. People have been forced into poor-performing funds through backroom deals and enterprise agreements that take away their choice. For too long, the industry has been putting their interests ahead of those of their members. They have forgotten that the money they hold on trust is not the banks’ money, the unions’ money or the funds’ money. It is the members’ money. It is their wages, so the system must work for them.

I’m proud of the action that I took to pursue a series of member-first superannuation reforms to end the rorts and rip-offs in the sector and to better protect Australians’ retirement savings. Many of these reforms were endorsed by the landmark Productivity Commission report on the superannuation system and the financial services royal commission. Thankfully, many have now been legislated, despite lobby groups using members’ money to try to block them. They include boosting the retirement savings of around three million Australians by about $6 billion, thanks to automatically reuniting lost and inactive low-balance accounts; capping fees on low-balance accounts and banning exit fees on all accounts, which will save members over half a billion dollars in 2019-20 alone; providing APRA with greater powers to crack down on dodgy funds; and introducing tougher penalties on fund trustees, including, for the first time, up to five

years in jail.

I’m also pleased that, today, we reintroduced legislation to implement my proposed reforms to improve default insurance arrangements, by making insurance cover opt-in rather than opt-out for new members under 25 years of age and for those with low- balance accounts. It is a scandal that people are defaulted into insurance that they don’t know about, don’t want, don’t need and, in some cases, can’t even claim on. If those opposite finally see sense and support our bill without amendment, it will mean up to $3 billion each year in retirement savings for millions of affected members. I also look forward to legislation being introduced which will give victims of crime, including victims of child sex abuse offences, access to the superannuation of their perpetrators as compensation.

There remain other areas to progress. Funds should have a greater focus on retirement incomes. The retirement income covenant is an important start, but more must be done in this area. I remain hopeful that parliament will extend choice of fund to the around one million Australians who are currently restrict from doing so. I also remain hopeful that parliament has the strength to tackle the long-vexed issue of default funds, where people make no active choice about their fund or how their money should be invested. In my view, given that the government compels Australians to put an ever- increasing percentage of their wages into superannuation, it’s only right that the government should offer up a solution to look after those foregone wages. It is my strong view that a conflict-free, low-fee government default fund could benefit millions of Australians by utilising the investment management expertise of the Future Fund. It would boost retirement incomes by taking advantage of economies of scale and would stop Australians from being defaulted into underperforming funds.

Fixing the superannuation system can be best summarised as getting a better deal for consumers. This has been a constant thread through the fabric of my ministerial and constituent work. I’m glad that we called the royal commission into the banking and financial services sector. It was the right thing to do. We were so keen to address the issues we had already identified that we underestimated just how strong a disinfectant the sunlight from a royal commission would be. (Highlight & underline by SOS). I’m pleased that the royal commissioner’s report endorsed many of the reforms that we progressed in the interim. I’m particularly proud of establishing the Australian Financial Complaints Authority, a one-stop shop to enable consumers and small businesses access to fast and free dispute resolution for banking, insurance, superannuation and financial advice. The government will extend its remit to look back 10 years.

The royal commission also endorsed the work we had done to design a compensation scheme of last resort for financial misconduct. I’m pleased the government has agreed to establish such a scheme. Time will tell, but I expect that our strengthening of ASIC, including the overhaul of its leadership and the introduction of an enforcement-focused deputy commissioner, will also have a big impact. A strong financial services system is essential to job creation. On that theme, I’m particularly proud of reforms to overhaul our insolvency laws and facilitate crowdsourced equity funding, which will support entrepreneurship and innovation.

At a local level, I have enjoyed resolving many diverse issues, but none has been more satisfying than securing a permanent home for the very first children’s hospice in Australia. Very Special Kids does the work of angels, helping families with the care of profoundly ill children and supporting families dealing with unimaginable grief when a child dies. I am exceptionally grateful for their work and will continue to champion them so that they get the world-class facilities that they need.

An issue that resonated strongly with me and my electorate was same-sex marriage. One of the most nerve-racking days that I had as a new MP was the day that I walked into the Federation Chamber to announce my support for same-sex marriage. Many warned me it was a career-limiting move, and maybe it was at the time, but I believe it was the right thing to do. I am proud that it will be the legacy of a Liberal government to have legislated same-sex marriage.

This brings me to the fourth and final issue, the quality of our democracy itself. My

time in this place has coincided with a deterioration of trust in both this institution and, indeed, the very concept of democracy. Social media and a proliferation of tribal echo chambers have led to warped perceptions of Australians’ views, a failure to listen to alternative ideas and a decline in genuine policy debate and civil discourse. Time spent in the community is the best antidote. However, technology has accelerated our lives and our expectations. Complex policy issues in an increasingly complex world don’t usually have an easy answer. The default response here should not be to immediately outsource decision-making to unelected people. Sometimes parliamentarians need to prosecute the case for patience and a deeper conversation with their electorates.

Equally concerning is the transformation of the Senate. It is now neither a house of review nor a house to protect the state’s interests. Rather, it has become a forum to frustrate the government’s agenda and the will of the people. This has contributed to undermining faith in our democracy and its institutions, and long-term policy outcomes for our country.

As my final observation in this place, I think that elected governments should be able to implement their mandates. I support the proposition endorsed by the Senate President for major parties to consider implementing an Australian version of the Salisbury convention. This would mean parties agreeing to abide by the convention that the Senate won’t obstruct the passage of legislation to effect government policy which has been fully and fairly disclosed to the Australian people well before voting commences in an election.

In conclusion, I would like to thank my colleagues, including a number that I have worked with across the aisle, and, in particular, Julie Bishop for her friendship and guidance. I am lucky that before I came into this place I had two lifelong friends who were already here: the Speaker of the House, Tony Smith; and the President of the Senate, Scott Ryan, who are both like big brothers to me—and, like big brothers, can both delight and infuriate me!

I want to place on record my thanks to Malcolm Turnbull for his friendship and also his great support of me when I gave birth—the first serving cabinet minister to do so. He also made me the youngest female cabinet minister, and, together with Scott Morrison, gave me portfolios with complex policy issues to work through. I have loved the intellectual stimulation and technical detail that has come with the second-largest legislative workload in this place. I would like to place on record my gratitude to the many hardworking public servants in my various portfolios, and the teams of people who enable our parliament to function.

To the Prime Minister: thank you for your friendship, your determination, your courage and your leadership. It has never been more needed than now. I know that, with you, our country is in good hands. I thank the House for its indulgence.

Double tax hit haunts near retirees

The Australian

18 February 2019

Simon Benson – National Affairs Editor

More than half a million Australians approaching retirement could suffer a double tax hit to their savings plans under Labor’s policy to axe franking credit refunds and curb negative gearing, new tax data analysis says.

More than 40 per cent of the 1.3 million people who already claim tax deductions on their rental properties are between 45 and 59, Australian Taxation Office figures show.

With an average rental loss of $9500, this group would also stand to lose the most from the scrapping of the scheme.

The government will claim that those already in the planning stage of their retirement would have two major retirement investment options taken off the table with the scrapping also of franking credit refunds, which are relied on by 900,000 Australians and mainly those in retirement.

While those already negatively gearing property will have their current arrangements grandfathered under Labor’s policy, the data reveals that people approaching retirement relied most on the tax deduction.

Negatively gearing property would be available in the future for only those buying new investment dwellings. The government argues that the impact would mean a significant investment option would be removed in the future for people planning for retirement.

Josh Frydenberg plans to revive the government’s campaign against Labor’s tax plans with a property industry roundtable this morning in Canberra hosted by the Property Council of Australia.

The council has warned against any changes to negative gearing or capital gains tax,

claiming the risk was too great, considering the current cycle in the housing market.

The Treasurer will use the roundtable to muster support among industry groups, which include the Master Builders Association and the Real Estate Institute of Australia.

The ongoing analysis of the 2015-16 ATO tax data being conducted by Mr Frydenberg’s office has revealed that Labor’s twin tax policies were heavily weighted against middle-aged Australians approaching retirement and those who had already finished their working lives.

Those aged between 45 and 59 represented the largest group to lose money from the scrapping of negative gearing on established dwellings.

This represents more than 525,000 Australians or 40 per cent of the 1.3 million Australians who claim rental losses on investment properties.

Of these, a total of 183,000 were aged 45-49, 183,000 aged 50-54 and 160,000 aged

55-59.

The ATO data is the same that has been used by the government on numerous occasions to attack Labor’s policies.

Mr Frydenberg said Labor’s “retiree tax” punished aspiration and no one would be hit harder by Labor’s housing tax than Australians approaching retirement.

“More than half a million Australians aged between 45 and 59 years of age will be worse off and have their hard-earned investment smashed by Labor’s changes to negative gearing,” he said.

“Not only is the proportion of those affected by Labor’s housing tax highest in this age group, their rental loss is the greatest too: the average net rental loss for those aged between 45 and 59 is around $9500, well above any other age group.

“This is the same age group that is working hard to put their retirement plans in place and who will also be punished by Labor’s retiree tax.

“In a double whammy for Australians approaching retirement age, not only will Labor raid their nest egg, they will also punish those who have invested in the housing

market.

“As a retiree under Labor, if you own your home it will be worth less, if you rent a home it will cost you more and if you invest in shares you will earn less.”

An exclusive Newspoll published last week by The Australian showed strong opposition to Labor’s $55 billion plan to scrap franking credit refunds.

Senior Labor sources privately admit the so-called “retiree” tax is unpopular but have calculated it would impact mainly Coalition voters rather than their own.

Last week, Bill Shorten stood by the policy, despite increasing pressure to modify or scrap it, saying he was “not for turning” on the policy.

In response, Mr Frydenberg said: “Another saying of (Margaret) Thatcher would have been more apt: ‘The problem with socialism is that you eventually run out of other people’s money’.”

Labor says the tax measures address an imbalance in the system that favours the well- off. It says only 2 per cent of Australians would be affected by the scrapping of franking credit refunds, while reducing the capital gains tax discount from 50 per cent to 25 per cent would mostly affect the top 10 per cent of income- earners.

Retirement dream at risk from Labor policy

The Australian

18 February 2019

Luke Griffiths – Journalist

Veterinary surgeon Derek Wells laments that his retirement plans have been thrown into disarray because of Labor’s proposed crackdown on franking credits for self- funded retirees.

Mr Wells planned to retire this year so he and wife Lyn, also a vet but now retired, could indulge themselves a little after 40-plus years of hard work.

Instead, the couple are gripped by anger and anxiety.

“I wanted to retire but I just cannot because we’re going to lose income and, with that, lifestyle and choices,” Mr Wells said at the couple’s home in the Adelaide Hills town of Echunga, 35km southeast of Adelaide.

The couple have cut their expenditure wherever possible in anticipation of a Labor government that they said would slash up to $20,000 — or one third — of their annual retirement income because of its plan to abolish a scheme that delivers cash payments for excess franking credits which was introduced by the Howard government.

They hope, but are not confident, the Senate will block Labor’s proposed measures, which they liken to elder financial abuse.

“We’re sitting down and working out what we can afford, trying to change electricity providers because we’re in South Australia and the prices are horrendous,” Mrs Wells said. “We’re trying to cut back on insurance … at the moment it’s a nip-tuck here, a nip-tuck there, because it’s a lot of extra money to find.

“The anxiety is something that every day we speak about because we’ve been waiting to do some things for 40 years and with the stroke of a pen, or a vote, the rules will suddenly change.”

The couple, who said they were not affiliated with any political party, have been self- employed most of their lives and have managed their own superannuation for more than two decades.

They are proud they’ve never had to rely on government handouts, yet Mr Wells, 63, dismissed the notion that all self-funded retirees were wealthy.

He said he and his wife were hardworking, middle-class Australians who followed expert advice and invested in companies that paid fully franked dividends.

“This is abuse of older people by Labor, coming up with a system to make it really hard for them … taking away any ‘cream’ they may have, making it harder for them to live. It’s just crazy,” Mr Wells said.

“This is not something society should be doing. It should be looking after older people, not picking on them. You try to have some pleasure in retirement and they’re taking away all that because you just won’t have the money for the things you want to do.”

Mrs Wells, 62, said Labor had framed its argument in simple terms — “really good one-liners” — that suggested those affected had done something wrong.

Mrs Wells said she was also angry with the Liberals after then treasurer Scott Morrison tinkered with superannuation in the 2016 budget. “Unfortunately, superannuation has become the government of the day’s honey pot.”

Labor tax hikes to bite workers

The Australian

18 February 2019

Editorial

Policy by policy, Josh Frydenberg is slowly but surely enlightening voters about how much the opposition’s tax changes would cost them. From retirees’ loss of franking credits and a higher marginal tax rate to super changes and a crackdown on capital gains and negative gearing, hundreds of thousands of Australians are realising they stand to be disadvantaged by thousands of dollars or more a year.

Given current property price trends, especially in Sydney and Melbourne, real estate investors do not need further dampeners.

At the very least, Bill Shorten and Chris Bowen owe it to the public to reveal when their planned hike in capital gains tax and negative gearing restrictions would take effect. They should also state if they would factor in the state of the property market before proceeding with their property tax grab, or even delay it until conditions improve.

As reported today, the Treasury has crunched the numbers, finding more than half a million taxpayers aged from 45 to 59, with an average rental loss of $9500, would be hardest hit by Labor’s housing tax.

The Treasurer is correct when he says workers approaching retirement face a double whammy under the opposition. Those who own homes or who have invested in rental property would find their assets worth less. Those renting would pay more. And those who have invested in shares would earn less through the loss of franking credits.

Aside from creating widespread personal hardship, such policies would discourage workers from being thrifty to ensure they are self-supporting in retirement, rather than relying on taxpayer-funded pensions.

The divisions between the major parties on tax and encouraging workers to keep more of their hard-earned money for retirement are stark. The question for voters is how widely they are prepared to open their wallets to fund Labor’s profligate social programs.

Labor’s superannuation and related proposals

Daniel Butler, Director (dbutler@dbalawyers.com.au)

Shaun Backhaus, Lawyer (sbackhaus@dbalawyers.com.au)

The next Federal election, according to our current Prime Minister Mr Scott Morrison, will be held in May 2019 and, if the Labor Government is elected, significant change is likely. Thus, a brief ‘stock take’ of what the superannuation landscape will look like under a Labor Government is set out below.

Cash refunds of franking credits

Labor proposes to deny cash refunds of franking credits from 1 July 2019. This proposal would largely impact individuals and self managed superannuation funds (‘SMSFs’).

In its “Pensioner Guarantee” media release on 27 March 2018, Labor claims that the distributional analysis shows:

  • 80% of the benefit of cash refunds of franking credits accrues to the wealthiest 20% of retirees;
  • 90% of all cash refunds to superannuation funds accrues to SMSFs (just 10% goes to APRA regulated funds) despite SMSFs accounting for less than 10% of all superannuation members in Australia; and
  • The top 1% of SMSFs receive a cash refund of $83,000 (on average) – an amount greater than the average full time salary (based on 2014-15 ATO data).

Under the proposed “Pensioner Guarantee”, Labor claims:

  • Every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.
  • SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes. For example, if one member was receiving a part Centrelink age pension of $100 before 28 March 2018, the SMSF will be exempt under the proposal.

Thus, under Labor’s proposed “Pensioner Guarantee” an individual who receives an Australian Government pension or allowance will be exempt regardless of whether their pension or allowance commenced before or after 28 March 2018. However, Labor will only exempt an SMSF if the member receiving the pension or allowance was a member of the fund prior to 28 March 2018. Note that there does not appear to be any sound reason or logic why SMSFs with a member who subsequently becomes entitled to an Australian Government pension or allowance should miss out on a cash refund.

The Tax Institute’s Senior Tax Counsel, Bob Deutsch, in his TaxVine report on 5 October 2018 noted that:

  • Interestingly, of the around 1,160,000 individuals who claim around $2.3 billion in cash refunds, 320,000 of them are expected to be exempt as a result of the “Pension Guarantee”. Accordingly, there will be around 840,000 individuals who will be subjected to the proposal.
  • In the context of SMSFs, there are around 420,000 people involved in such funds, with the funds receiving around $2.6 billion in refunds. Around $1.3 billion of these refunds are received by SMSFs that are in full pension mode with each of these SMSFs on average having assets in excess of around $2.4 million (almost 50% of the $2.6 billion in refunds goes to SMSFs with considerably more than $1.6 million in super savings).

Large industry and retail superannuation funds typically will be able to offset any franking credits received against tax payable in each FY and will therefore generally not be adversely affected by this proposal.

The SMSF Association’s submission dated 29 October 2018 to the House of Representatives Standing Committee on Economics on the inquiry into the implications of removing refundable franking credits stated:

Under the proposed policy individuals with the same circumstances, in the same refundable position, will incur a different results depending on the vehicle they choose to hold their shares. Most notably, SMSF members are worse-off under the ALP policy than other superannuation fund members who are in pension phase and benefit from franking credits. The ALP policy proposes that refunds from dividend imputation are appropriate for almost all investors except for SMSF investors and those shareholders with low taxable incomes.

The SMSF Association’s submission also noted that the proposal will:

  • Result in a change in asset allocation, eg, from Australian franked shares to international equities, property or more risky investments.
  • Result in more members joining SMSFs to assist in soaking up franking credits. Refer to DBA Lawyers’ Admit a Conditional Member offering.

Moreover, some SMSF members will also consider whether having a pension in retirement phase is worthwhile if the fund is ‘burning’ excess franking credits. The example below shows that an SMSF with two members each with $1.6 million are no worse off converting to accumulation phase (ie, commuting their account-based pensions) as they substantially reduce their wastage of franking credits that would no longer result in a cash refund under Labor’s proposal to stop cash refunds. The SMSF also accumulates greater assets for the longer-term in the concessionally taxed superannuation environment by not having to pay out annual pension payments to its members.

In particular, the Dividend Wasted SMSF (see below example) where the two members are both in pension phase (ie, in retirement phase) with 45% of the fund’s investments in Australian franked share investments, has a $24,686 wastage of franking credits under Labor. Under current law, this fund would receive a $24,686 cash refund.

In contrast, the Dividend Offset SMSF (see below example) has the same share portfolio as the Dividend Wasted SMSF but is fully in accumulation mode. This fund only wastes $5,486 of franking credits. Under current law, this fund could also obtain a $24,686 cash refund if both members received a pension in retirement phase.

Example – SMSF converting to accumulation to reduce franking credit wastage

Dividend Wasted SMSF

Dad 1600000 ABP – ECPI
Mum 1600000 ABP – ECPI
Total funds 3200000
Sundry income 70400
Dividends 57600
Total income 128000
Tax thereon 0 ECPI
Franking offsets 24686 wasted

Dividend Offset SMSF

Dad 1600000 Accumulation mode
Mum 1600000 Accumulation mode
Total funds 3200000
Sundry income 70400
Dividends 57600
Total income 128000
Tax thereon 19200
Franking offsets 24686
Franking offsets 5486 wasted

Assumptions:

Australian franked share investments 45% 1440000
Yield (excl franking credits) 4% 128000
Company tax rate 30%
100% franking applies 30/70

Definitions:
Account-based pension (‘ABP’)
Exempt current pension income (‘ECPI’)

Naturally, if a refund is available to individuals or SMSFs prior to 30 June 2019 (but not afterwards), then a greater distribution prior to this proposal being introduced may be more attractive. Thus, there are many companies carefully examining what their optimal dividend distribution policy is prior to 30 June 2019.

There has also been considerable press coverage of Labor’s franking credit proposal since it was announced.

Taxation of trusts

Bill Shorten in his ‘A Fairer Tax System For All Australians’ Media Release dated 30 July 2017 announced that:

  • Labor will introduce a standard minimum 30% tax rate for discretionary trust distributions to mature beneficiaries (people over the age of 18).
  • Under Labor, individuals and businesses can continue to make use of trusts – and trusts will not be taxed liked companies.
  • Labor’s proposal will not apply to certain trusts such as:
    • special disability trusts;
    • testamentary trusts;
    • fixed trusts or fixed unit trusts;
    • charitable and philanthropic trusts;
    • farm trusts (query what these are); and
    • public unit trusts (listed and unlisted).

Broadly, under the current law:

  • Unit trusts do not pay any tax provided the trustee distributes its net income to unitholders prior to each 30 June.
  • Where an SMSF is a unitholder of a unit trust, the SMSF trustee pays a maximum of 15% tax on unit trust distributions.
  • An SMSF will typically only pay 10% tax on unit trust distributions of net capital gains (after allowing for the one third CGT discount) on the disposal of assets held for more than 12 months.
  • An SMSF in pension (retirement) phase does not pay any tax on unit trust distributions subject to each member’s transfer balance cap (‘TBC’) limit.

While the Labor proposal is aimed at levying a minimum 30% tax rate for discretionary trust distributions to adult beneficiaries, this proposal is not supposed to apply to fixed trusts. This is technically a very limited category of unit trust, with the vast majority of SMSFs investing in nonfixed trusts. It is important to consider what is meant by ‘fixed’ and what definition will apply.

Broadly, trusts are divided for tax purposes into fixed and non-fixed trusts for trust loss purposes under schedule 2F of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’). There are strict criteria on what is a fixed trust under this test. Most other trusts fall into the broad category of nonfixed trusts and these trusts are broadly treated as discretionary trusts for tax purposes.

In relation to superannuation funds investing in unit trusts, the ATO currently do not administer the law in this strict manner but without clarity on Labor’s proposal, it is expected that the test that will be adopted by Labor would be the test in schedule 2F of the ITAA 1936, or a similar test.

Labor could therefore, unless SMSFs investing in non-fixed unit trusts are carved out, tax SMSFs at a minimum of 30% on trust distributions received from many unit trusts. This would have a significant impact on the net after tax returns that these trusts derive after the new trust’s tax regime proposed by Labor is introduced.

To explain by way of a brief example:

Non-fixed unit trust distribution to SMSF

A unit trust distributes $10,000 of net income to an SMSF unitholder.

Under current law:

The SMSF will generally pay $1,500 in tax (assuming no net capital gain is included).

Under Labor’s proposal:

The SMSF will pay $3,000 tax (assuming no net capital gain is included).

However, if the unit trust qualifies as a fixed trust, the tax should be $1,500 (ie, as under current law).

It is noted that if the unit trust is non-fixed, the ATO currently administer the law in a more practical manner as outlined in TR 2006/7. Broadly, provided distributions by the unit trust are made proportionately based on unitholding proportions, rather than based on a discretion, the ATO will typically not apply a 45% tax rate under the non-arm’s length income rule in s 295-550 of the Income Tax Assessment Act 1997 (Cth).

Chris Bowen as quoted in the Financial Review on 11 August 2017 stated:

The claim that self-managed super funds could be hit by Labor’s trust proposal (‘SMSFs could be hit by Labor Trust proposal, August 9) is simply wrong…

…Labor’s policy to apply a minimum rate of tax on certain distributions targets income splitting and will not have any impact on fixed unit trusts, including non-geared unit trusts owned by superannuation funds. Technical legal classifications between fixed versus non-fixed trusts are longstanding issues readily resolved within the taxation system and completely distinct from Labor’s announcement to curb income splitting through discretionary trusts.

For guidance on how the ATO currently administers this area, refer to TR2006/7 and PCG 2016/16. Unless an appropriately drafted unit trust is obtained upfront, there can be considerable downstream hurdles with seeking to change a non-fixed trust to a fixed trust, including duty, land tax and other potential implications, especially if the ATO change its current administrative practice.

Broadly, for large public offer managed investment trusts, less stringent tests apply in determining whether such a trust qualifies as a fixed trust.

The Tax Institute’s Senior Tax Counsel, Bob Deutsch, has also noted that it is still uncertain how Labor’s policy on how it proposes to tax trust distributions will apply in practice. For example, will the general CGT discount apply, will any tax offset apply like a franking offset in respect of a dividend from a company, and what types of trusts will be considered fixed and non-fixed?

Moreover, Labor’s policy has created considerable uncertainty for investors and business people seeking to undertake investments or enter into new business structures given this broad brush proposal. A discretionary trust has been a popular ‘structure’ to accumulate assets and to operate a business in but in view of Labor’s proposal many may now want the greater certainty offered by a company given the future outlook for trusts is so uncertain.

Labor should therefore urgently provide clearer guidance on its trust’s tax proposal especially on what trusts will be carved out of its proposal.

Superannuation guarantee

Labor propose to increase the current superannuation guarantee charge rate from 9.5% to 12% as soon as practicable instead of the current gradual increase – which is already current law to 12% from 1 July 2025 – see table below. Should this be achieved, Labor then proposes to achieve its original objective of increasing the minimum rate to 15%.

Period Rate
1 July 2018 to 30 June 2019 9.5%
1 July 2019 to 30 June 2020 9.5%
1 July 2020 to 30 June 2021 9.5%
1 July 2021 to 30 June 2022 10.0%
1 July 2022 to 30 June 2023 10.5%
1 July 2023 to 30 June 2024 11.0%
1 July 2024 to 30 June 2025 11.5%
1 July 2025 to 30 June 2026 and onwards 12.0%

Labor will also pursue policies that seek to reduce the extent of unpaid superannuation in Australia, and seek to improve the ability of workers to recover their unpaid superannuation as an industrial right.

Non-concessional contributions cap

Labor will lower the annual non-concessional contributions (‘NCC’) cap from $100,000 to $75,000.

Naturally, this impacts the bring-forward cap which will reduce from $300,000 to $225,000 (ie, 3 x $75,000).

Naturally, NCCs are subject to the $1.6 million total superannuation balance limit.

Division 293 threshold

The threshold at which high income earners pay additional contributions tax will be lowered by Labor from $250,000 to $200,000.

Rolling 5 year catch-up concessional contribution cap

Members with a total superannuation balance of less than $500,000 are currently permitted to make additional concessional contributions (‘CCs’) where they have not reached their CCs cap in the prior five FYs. This can effectively equate to a rolling five year average CC cap of up to $125,000 that can be made in one FY where the member in year 5 has made no CCs in the prior four FYs commencing after 1 July 2018.

For example, if a member and their employer only contributes $10,000 of CCS in FY2019, the member will effectively have an unused CC carry forward cap of $40,000 in FY2020 (ie, $15,000 unused CC cap in FY2019 plus a $25,000 CC cap in FY2020).

Tax deduction for personal superannuation contributions

From 1 July 2017 the Turnbull Liberal National Government abolished the 10% rule which provides greater flexibility for individuals to claim personal superannuation contributions.

Labor propose to reintroduce this 10% rule to again restrict personal contributions.

By way of background, under current law individuals can make CCs up to the CC cap following the removal of the 10% test on 30 June 2017 regardless of their employment circumstances.

As you may recall, broadly, the 10% test prior to 30 June 2017 precluded individuals from claiming personal superannuation contributions where they earned more than 10% of their overall earnings from employee type activities.

For example, under current law, if an employer makes superannuation contributions of $10,000 on behalf of an employee, the employee may make an additional $15,000 of personal CCs to superannuation, and claim a deduction for this amount despite having 100% of their earnings from being an employee (subject to having sufficient taxable income to offset the deduction).

Note that the $1.6 million total superannuation balance test does not restrict CCs but does limit NCCs when the member’s total superannuation balance exceeds the $1.6 million threshold.

For more information on personal deductions, refer to:
http://www.dbalawyers.com.au/ato/budget-means-right-now-personal-deductible-contributions/

Low income superannuation tax offset

The ALP’s 2018 National Platform, ‘A Fair Go for Australia,’ states that Labor will maintain a low income superannuation tax concession (currently called the low income superannuation tax offset, ie, ‘LISTO’) and will develop policies that will further support low income earners to save for their retirement. Further, Labor will review the interaction between the age pension and superannuation.

Low income earners may receive a tax offset of up to $500 per FY on their CCs to help them save for their retirement. Broadly, to be eligible for this payment, the member’s adjusted taxable income must not exceed $37,000 and 10% or more of the member’s total income must have been derived from business or employment.

Ban new LRBAs

Labor is committed to banning SMSFs entering into new limited recourse borrowing arrangements (‘LRBAs’). As part of Labor’s housing affordability policy, in April 2017, it announced that it would ‘restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry’. A media release by Bill Shorten at this time claimed this would ‘help cool an overheated housing market, partly driven by wealthy SMSFs’.

Pension exemption limit of $75,000 p.a.

Mr Chris Bowen in his ‘Positive Plan to Help Housing Affordability’ media release on 18 January 2019 stated that Labor has already acted to reduce the generosity of tax concessions for high income superannuants – to moderate concessions for Australians with superannuation balances in excess of $1.5 million. This item was published in SMSF Adviser’s news on 23 January 2019 which noted that Labor first announced this $1.5 million limit in April 2014.

If elected, it would appear that there is the prospect that Labor will further limit the tax exemption for earnings on superannuation balances in pension phase that exceed $1.5 million. While it has never been clear how this proposal would actually operate in practice, it is broadly understood that earnings on assets supporting income streams in retirement phase will be tax-free up to $75,000 p.a. for each member (note that a 5% p.a. yield on $1.5 million of pension assets equates to $75,000). However, earnings above $75,000 would be taxed at 15%.

It is also expected, based on a prior Labor announcement, that assets acquired prior to the start of this new regime will be grandfathered for capital gains tax (‘CGT’) purposes. Broadly, under this announcement it would appear that net capital gains on assets acquired after this new regime commences would be added to the income earned subject to the $75,000 exempt earnings threshold in respect of each financial year (‘FY’).

An example from a prior Labor Fairer Super Plan noted that a 63 year old retired lady called Susie with $1.8 million invested in super who received a $90,000 pension (reflecting a 5% yield), would pay 15% tax on $15,000 of her pension amount above the first $75,000 tax free amount, excluding applicable levies.

While there has been recent media coverage of this proposal, I am not convinced this proposal will be introduced as initially outlined. Given the $1.6 million transfer balance cap (‘TBC’) is now firmly implemented with all its associated machinery and appears to be largely working as planned, I suspect that Labor may not want to introduce a whole new system that may prove very difficult in practice to implement and operate. If any further limit on the pension exemption is introduced, I suspect it will be to reduce the $1.6 million TBC amount or to freeze any future indexation of the general $1.6 million TBC threshold. Recall that the $1.6 million TBC amount will be indexed in $100,000 increments in line with CPI.

Limit negative gearing

Labor stated in its ‘Positive plan to help housing affordability’ that it will limit negative gearing to new housing from a yet-to-be-determined date after the next election (which is expected to be 1 July 2019). All investments made before this date are not be affected by this change and will be fully grandfathered.

This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

From a yet-to-be-determined date after the next election (which is expected to be 1 July 2019) losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

Bob Deutsch, CTA and Senior Tax Counsel of The Tax Institute, confirmed in The Tax Institute’s blog ‘Labor’s negative gearing restrictions – how might they work?’ (23 November 2018) that the Labor Party’s proposed changes to negative gearing would apply across the board to all investments. Previously it was thought that Labor’s negative gearing restrictions might only apply to property investment.

Bob Deutsch’s article states:

So, to the proposals themselves – after some interrogation of the Labor party, I have been able to confirm that Labor’s restrictions on negative gearing will apply (after a yet-to-be announced commencement date) to all investments and it will apply on a global basis to every taxpayer. In other words, it will apply to property and shares alike (and any other relevant asset classes) and it will apply by looking at a taxpayer and assessing their overall investment income as measured against their overall investment interest expenses.

Both these points are critical to an understanding of what is proposed, and while Labor has previously hinted at both outcomes, I can now confirm that the policy design will be precisely along these lines.

After examining three different practical examples, Bob Deutsch’s article states:

…, the key to dealing with the proposed fallout from Labor’s restrictions on negative gearing – management of portfolios in order to have regard to the restrictions on negative gearing, will become crucial.

In addition, purchasing properties in the name of the family member best able to manage any negative gearing restrictions will also be vital.

Naturally, this proposal may encourage taxpayers to enter into negative gearing strategies before Labor’s negative gearing restrictions are introduced.

CGT discount

Labor proposes to reduce the 50% general CGT discount available to individuals on asset disposals where the asset has been held for more than 12 months under div 115 of the Income Tax Assessment Act 1997 (Cth) to 25% from 1 July 2019.

Labor has stated in its ‘Positive plan to help housing affordability’ that:

  • All investments made before this date will not be affected by this change and will be fully grandfathered.
  • This policy change will also not affect investments made by superannuation funds.
  • The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.
  • Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.

Bob Deutsch’s article states:

The practical effects of these housing affordability policies are not yet clear. For example, investors might sell properties in the basis that, due to these incoming laws, property investment may be less attractive in the future leading to lower prices. Conversely, investors may decide to hold on to grandfathered assets to enjoy the expected capital gains on that asset rather than sell, which could lead to less properties for sale.

As you would be aware, superannuation funds are only entitled to a one third CGT discount on assets held for more than 12 months (broadly to the extent the pension exemption does not apply). Labor has noted that the CGT discount applicable to superannuation funds would not be reduced.

Deductions for tax advice

Labor propose to limit deductions for tax advice to $3,000 a year. Individuals, SMSFs, trusts and partnerships are to be subject to the cap while companies would not be.

We query if this limit will apply on a per entity basis or whether it might apply on an aggregated ‘associated’ entities basis. It can often be difficult, for example, to determine where advice for an individual ends and advice for their ‘associated’ entities begins.

Paul Drum, CPA Australia, head of policy, believes:

… this proposal needs a lot more work as many Australians go through significant one-off life events such as a divorce, inheritance or retirement, when they require specialist advice that could cost well over $3,000. Simply carrying out proper planning for large life events such as commencing a business or working overseas could easily exceed this cap. This sort of planning is necessary to ensure tax laws are properly followed and taxpayers don’t fall foul of the ATO.

In an article available via the Financial Review, the Institute of Public Accountants president Andrew Conway, is said to be ‘vowing to mobilise the large accounting workforce to oppose the measure in the lead up to the next election’ (‘Accountants vow to campaign against $3000 cap on managing tax affairs’, 13 January 2019).

It is yet to be determined if this limit will include litigation costs, ATO audit costs and ATO interest payment costs. There have also been calls for a small business concession to be applied.

With so many other proposed changes to tax laws likely to require advice, many would readily exceed this proposed cap simply trying to understand these changes and manage their affairs accordingly. In Australia, there is one certainty in superannuation and tax law –– constant change.

Invariably the devil is also in the detail. We understand from a number of leading tax academics that Australia has a reputation for being one of the most complex tax systems in the world and probably ranks second to the USA. The constant ongoing complex changes to superannuation and tax rules will keep Australia as a leader in complexity.

In particular, responding to a relatively straight forward ATO review or audit can easily exceed a $3,000 threshold which is becoming increasingly likely for many.

Further policy proposals

Labor also has planned policy releases leading up to the election which are not yet publically available. Namely, as outlined in ALP’s 2018 National Platform, ‘A Fair Go for Australia,’ Labor proposes to:

  • Ensure that the superannuation guarantee is legislated to become part of the national minimum employment standard (NES) so that it is enforceable as an industrial entitlement. Broadly, this will, among other things, give employees access to the Fair Work Commission and pursue other industrial remedies for unpaid contributions.
  • Maintain a low income superannuation tax concession (currently called the LISTO) and will further support low income earners to save for their retirement.
  • Review the interaction between the age pension and superannuation.
  • Implement policies that work towards closing the significant gender gap in superannuation savings, including eliminating the $450 minimum threshold for compulsory employer contributions.
  • Initiate within the first 6 months of taking office an expert review to examine the adequacy of mechanisms to strengthen the superannuation balances of women, including options for government contributions to account balances where the account balance is very low.
  • Legislate to provide superannuation contributions on the Federal Government paid parental leave scheme.

General observations

A number of Labor policies are proposed to commence by 1 July 2019 or when an announcement is made after the election. However, in view of the election being likely to take place in May this year, it may prove difficult for Labor to introduce changes with a 1 July 2019 commencement date.

Naturally, until a proposal or change becomes law, it should not be relied on as law. History has also shown that there is considerable uncertainty with relying on legislation by media release. For example, one of the worst policy blunders that comes to mind here was the lifetime non-concessional contributions (‘NCC’) cap of $500,000 that was proposed to apply from the 3 May 2016 Federal Budget by the Turnbull Liberal National Government with effect from the announcement of the 2016-17 Federal Budget on 3 May 2016. This proposal was scrapped and a $1.6 million total superannuation balance cap was introduced in September 2016 following substantial adverse feedback.

CONCLUSIONS

If Labor are elected, there will be considerable superannuation and tax changes that are likely to have wide ranging impact.

Like the last round of major changes to the superannuation system in mid-2017, these proposed changes may take years to finalise and properly implement.

It was only a few years ago that both major political parties promised stability within the superannuation system, as the $2.7 billion plus of superannuation investments are a major part of Australia’s financial system.

Constant changes to the superannuation rules undermines investor confidence.

DBA Lawyers is continually reviewing developments as they unfold and refining its services to keep on top of ongoing changes. We also offer an extensive range of education (aka CPD) training to keep you ahead of the changes.

Related articles

For further reading, please see the below articles:

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Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit http://www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit http://www.dbalawyers.com.au.

DBA LAWYERS

15 February 2019

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