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.

The Australian

Judith Sloan, Contributing Economics Editor

5 February 2019

The final report of the royal commission released yesterday contains 76 recommendations. Seven of these relate directly to superannuation.

Notwithstanding the importance of superannuation — it is noted in the report that the current amount of superannuation assets under management amounts to 140 per cent of total GDP — superannuation was given relatively little direct attention during the course of the investigation. There were only two weeks of public hearings devoted to the topic.

However, there is considerable meat in some of the recommendations, although some options that were canvassed were rejected — for example, the prohibition of for-profit super funds. By the same token, the report contains discussion of the need for the careful handling of conflicts of interest by the trustees of retail funds and the requirement to serve the best interests of fund members above all other interests.

Unsurprisingly, there is some overlap between the recommendations of the royal commission and those of the Productivity Commission report on superannuation. Commissioner Kenneth Hayne is very attracted to superannuation members having only one default fund and that arrangements need to be put in place to ensure members do not accumulate multiple funds (with multiple fees and charges and insurance coverage) unwittingly.

The government has legislation that has been passed by the house that will give power to the Australian Taxation Office to consolidate inactive and low-balance accounts.

Given that Bill Shorten has already declared Labor will support all the royal
commission recommendations, there should be no problem with Labor allowing this bill to be passed by the Senate.

Hayne also examines the governance of funds and queries whether the equal representation model of industry super funds is always fit for purpose. While baulking at legislated directives of the composition of trustee boards, he clearly thinks there will need to be changes to ensure properly qualified trustees are fulfilling the sole purpose of benefiting members rather than meeting the needs of their nominating organisations.

There are also some useful suggestions such as prohibiting the deduction of fees for advice from MySuper products; a ban on canvassing for super through telemarketing, for example; and a proscription of treating of employers by superannuation funds in order to entice them to select particular default funds. This latter recommendation could call into question sponsorship arrangements that many super funds have in place.

In sum, the small section of the final report of the royal commission on super contains a number of sensible recommendations, some of which are already in the pipeline.

With Labor’s support, some changes can be made quickly while others will take a little longer.

The key is that the interests of members must be at the heart of the superannuation system.

Both the regulatory framework and the activities of the regulator must ensure that this principle is always met.

The Australian

2 February 2019

Simon Benson, National Affairs Editor

The Morrison government will frame an election battle over superannuation reforms, as the $2.7 trillion sector braces for a sweeping shake-up following what is expected to be a damning final report of the Financial Services Royal Commission on Monday.

Josh Frydenberg yesterday accused the opposition of blocking reforms — backed by the Productivity Commission and expected to be addressed by commissioner Kenneth Hayne in his final report — that would hand the prudential regulator extra power to target dozens of underperforming super funds and up to 1.6 million accounts held in poor-performing MySuper funds.

The Weekend Australian understands the government will move to bring on a vote on its legislation in the Senate when parliament resumes on February 12 in what will be a direct challenge to the opposition to support the reforms.

The proposed powers would give the Australian Prudential Regulation Authority the ability to take corrective action against underperforming funds and even shut down habitual offenders. Five-year jail terms for directors who fleece members’ funds and fines of up to $420,000 are also being considered.

The superannuation sector is preparing for a major shake-up following scathing evidence about the underperformance of funds across the spectrum, including negative returns for some members. The MySuper default funds would be the primary targets of the legislation.

It is widely expected in the industry that the final report of the royal commission, handed to Governor-General Peter Cosgrove and the Treasurer yesterday, will include changes to APRA’s ability to intervene in the management of super funds.

A Productivity Commission report into superannuation, released to the government in December, found a mixture of 29 underperforming funds across retail, industry, corporate and public sector funds, including specific issues with default products.

There are currently 1.6 million accounts in underperforming MySuper products.

The Treasurer moved this week to draw Labor out on the superannuation reforms ahead of the release of the royal commission’s final report.

“The legislation that the Coalition has introduced into parliament, which is supported by the independent Productivity Commission, will provide APRA with critical additional powers to drive out underperformance in the superannuation industry,” Mr Frydenberg said yesterday.

“It is beyond belief that the Labor Party will not support penalties for superannuation directors who breach the law. Who are they trying to protect?

“When Bill Shorten was minister for financial services and superannuation, he did nothing to increase APRA’s powers to deal with underperforming funds or impose penalties on trustee directors who breach the law.

“The Coalition’s primary focus is to maximise the money that Australians have when they retire so they can enjoy the retirement they deserve. The legislation that the Coalition has in the parliament helps deliver on this objective.”

The Treasurer yesterday also took the attack to Labor over other powers in the legislation that included allowing the ATO to consolidate automatically multiple and inactive super accounts into a member’s primary super account to address an estimated $6.5 billion in missing super funds.

The government says that, in some cases, people in poor-performing funds would retire $500,000 poorer than if they were in an average fund.

Mr Frydenberg cited a scenario from the Productivity Commission where a person aged 21 starting on a $50,000 salary and retiring at 67 would be more than $500,000 worse off when they retired if they defaulted to a bottom-quartile MySuper product versus a top-quartile MySuper product.

Opposition Treasury spokesman Chris Bowen has accused the government of
cowardice by not presenting the Protecting Your Super legislation to the Senate yet. Mr Bowen has flagged similar powers for APRA to act against underperforming funds under a Labor government but has claimed the Coalition’s proposed model is flawed.

The Weekend Australian understands the government late last year privately floated amendments that would have watered down the legislation to get support for the bill in the Senate.

Mr Bowen said last night he would welcome the bill being brought on for a vote and had already indicated to the government Labor would back the bill if the Coalition accepted the opposition’s amendments. “Our amendments improve the bill by allowing APRA to carve out funds where APRA is convinced that (it) is in the best interests of the member and/or there are high-risk occupations,” Mr Bowen said.

Under current laws, directors of trustees do not face civil or criminal penalties for breaching their duties. Evidence provided to the royal commission found a significant flaw in the regulator’s powers and ability to hold directors to account.

The Productivity Commission report recommended that the government’s reforms be legislated and suggested they could have gone even further in reform of the sector. The report said that although the legislation would not fix problems in financial system governance, including those identified by the commission and the royal commission, the package was “welcome and warrants support”.

Mr Frydenberg said the legislation would also give APRA powers to reject a change of ownership of a fund, such as that which occurred under the failure of Trio Capital in 2009, when $176 million was wiped from members’ benefits. The Financial Services Council said it would not be speculating on what the royal commission’s final report might contain in relation to the expected shake-up of the superannuation sector. FSC chief executive Sally Loane said in relation to greater powers for APRA: “The FSC strongly supports policy outcomes that provide regulators with the powers to ensure poor-performing super funds of any kind lift their performance or merge with better- performing funds.”

The government has indicated it will adopt the recommendations of the royal commission, first called for by Mr Shorten.

The Australian

1 February 2019

Judith Sloan, Contributing Economics Editor

I hadn’t heard the term “listicle” until I was reading about the downsizing of digital media outfit Buzzfeed. Evidently it just loves a listicle — an article based entirely on a list. Mind you, the topics of these lists sound pretty childish and fatuous.

So let me put together a serious list based on the serious policy errors Labor’s Treasury spokesman Chris Bowen has made by proposing to cancel cash refunds for excess franking credits.

• Paying too much attention to advice from the former treasurer and prime minister Paul Keating is a big mistake. Keating’s view of the world is that if he didn’t introduce it, it must be wrong.

• It was always an oversight that cash refunds for franking credits were not offered to those on low incomes who pay no or little tax.

• There are plenty of examples of refunds being paid to people and businesses who pay no net tax. After all, close to half the population pay no net tax, yet many of them receive a tax refund after the close of the financial year. Is Bowen going to get rid of this arrangement?

• And let’s think about trade unions, charities and not-for-profits. They don’t pay any tax but Bowen is proposing that cash refunds for these entities be retained. Some trade unions have net assets of more than $100 million and have substantial stockmarket investments.

• Why would Bowen think that exempting recipients of the Age Pension who registered before March 28 last year from the cancellation of cash refunds makes any sense? If you have signed up to the Age Pension after this date, it’s just bad luck and you will be treated differently from your mate down the street in the same income and asset position.

• Bowen is mistaken that this policy hits the rich. The rich, particularly after the government implemented the $1.6m superannuation tax-free cap, will be able to use the tax they pay to claim the franking credits, either in full or part.

• It is those retirees who just miss out on the Age Pension who will be badly hit, because they will simply lose the cash refunds without any compensation. And there are one million of them.

• Would Bowen tell one of his unionised mates that it’s fine to have their pay cut by $3000 or $5000 or $7000 each year because “the age of entitlement is over”?

• Older women, many of them widows, will be the worst-affected group.

• By the way, Bowen should declare that he is not a licensed financial planner when he tells retirees that they have overinvested in franked Australian shares and they should diversify into overseas equities and unfranked Australian shares (many of which don’t pay dividends).

• Bowen is undermining the case for increasing the superannuation guarantee charge (from 9.5 per cent to 12 per cent) because individuals and couples who save more in superannuation and go over the asset/income thresholds of the Age Pension will actually be worse off.

• There is no fiscal difference between a government offering tax deductions/rebates and paying cash refunds, and Bowen should know this in terms of the budget bottom line. It would be more honest for him to propose ditching the whole dividend imputation system, if that’s his view.

• The notion that the elimination of cash refunds will “save” $11.4 billion over the forward estimates should be treated with a grain of salt. Watch retirees rearrange their affairs to qualify for the Age Pension, which will offset the savings.

The Australian

31 January 2019

Simon Benson, National Affairs Editor

Joe Kelly, Political Reporter and

Greg Brown, Journalist

Bill Shorten has defended Chris Bowen for saying retirees who don’t like Labor’s dividend imputation crackdown are “entitled to vote against us”, saying his Treasury spokesman was merely pointing out there was a “choice in policies”.

The Opposition Leader said Labor was being upfront with voters about how it will raise revenues by clamping down on “unsustainable tax concessions”.

He said axing cash refunds for franking credits would enable a Shorten government to spend more on services such as health and education.

“Chris was saying there is a choice in policies, and that is sensible. There is always a choice,” Mr Shorten said.

“We respect all Australians. That is why we are putting all of our policies out in advance. We have done something unusual in Australian politics: we are explaining how you pay for things before we then say how you use some of that money.

“But I think it is appropriate that we shut down unsustainable tax concessions. Why are we the only country in the world who will let people claim an income tax refund when they have paid no income tax in that year? It is generous but it is not sustainable.”

Mr Shorten said Labor would be a better choice than the government for retirees because it would lower electricity bills, make private health insurance more affordable and unfreeze the Medicare rebate for patients.

He rejected claims by World Vision and the Cancer Council that Labor’s franking

policy would lead to reductions in donations.

“What I can say to charities in the future is that because of a Labor government the causes you are most interested in are going to get a better deal in funding from a Labor government,” he said.

“We should have a health system that doesn’t rely on charity but relies on your Medicare card. “

‘PM: a two-fingered salute to retirees’

Scott Morrison says Mr Shorten will give the “two-fingered salute to retirees” if he becomes prime minister as the government ramps up its attack on Labor’s $55.7 billion dividend imputation crackdown.

The Prime Minister leapt on comments from Mr Bowen, who said self-funded retirees upset with Labor’s plans to axe cash refunds for franking credits were “entitled to vote against us”.

“This is the arrogance. They so think they are going to win the next election. They so think it that they just don’t care,” Mr Morrison told 2GB radio.

“And they will change it all. They will basically just give the two fingered salute to retirees right across the country and they just dare them.”

Mr Morrison said people were “turning up in droves” to committee hearings on the policy in Queensland, saying the rooms had to be expanded to fit in all the concerned self-funded retirees.

He said World Vision and the Cancer Council say the policy would reduce donations to charities.

“(Mr Shorten) hasn’t just got his hands into retirees pockets he’s got his hands into the donations bucket at the train station,” Mr Morrison said.

More than 50,000 voters across the nation’s 10 most marginal seats stand to lose up to $2700 a year under Labor’s policy.

On the Opposition Leader’s negative gearing reforms, Mr Morrison claimed the policy would “take 30 per cent of buyers out of the housing market” and lead to a “price collapse”.

“And if you get a shock to the housing market like this, then that will affect the economy because of consumer confidence. That’s when it runs onto jobs,” Mr Morrison said.

“It is like when you buy a new car. The minute you drive it off the lot it falls in value. That is what Labor’s policy is going to do to the value of your home.”

ALP goads seniors: vote against us

Chris Bowen has told self-funded retirees upset with Labor’s $55.7 billion franking credit crackdown to “vote against us”, as new data reveals more than 50,000 voters across the nation’s 10 most marginal seats stand to lose up to $2700 a year on average under the opposition tax grab.

Drawing battlelines months out from a May election, Bill Shorten’s Treasury spokesman yesterday appeared to pit older Australians against working families after dismissing the grievances of retirees concerned about losing their cash refunds for excess franking dividend credits.

Josh Frydenberg last night told The Australian “Labor’s not listening; Labor doesn’t care”, and accused the opposition of “arrogantly” ignoring the concerns of self-funded retirees.

“Bill Shorten is obsessed with class warfare and pitting one Australian against another for political gain,” the Treasurer said. “His retiree tax is designed to punish aspiration and those who have taken personal responsibility for their own retirement.”

Mr Bowen’s remarks came as new analysis of tax data shows the policy, a key Labor measure set to raise $55.7bn in revenue over 10 years, would be a potential trigger issue at the election in May, with up to 8 per cent of voters claiming the refunds in the 10 most tightly held electorates.

Confirming yesterday that Labor had no intention of modifying or delaying the election policy, despite admitting it would not be popular with many Australians, Mr Bowen said the refund scheme cost taxpayers almost as much as was spent by the commonwealth on public schools: “If they (voters) feel very strongly about this, if they feel that this is something which should impact on their vote, they are of course perfectly entitled to vote against us.”

National Seniors Australia and the Self-Managed Super Fund Association yesterday hit back at Labor, warning that many people would simply restructure their affairs and go on to the pension.

Mr Bowen later told The Australian that his remarks could in no way be construed as offensive as they were merely an expression of people’s democratic rights.

“It’s a pretty unremarkable revelation that we live in a democracy and people are under no obligation to vote for a party if they don’t like its policies,” he said.

Referring to Coalition claims of Labor arrogance, Mr Bowen said: “There’s nothing more arrogant than promising ‘no cuts to schools, to hospitals, to the ABC and SBS’ before the 2013 election and then delivering those cuts in the 2014 budget.”

According to the most recent available tax data, but factoring in the redrawn electoral boundaries for the next election, more than 4000 voters in the north Queensland seat of Herbert — held by Labor on a margin of 0.02 per cent — claim an average of $2295 in cash refunds annually. In the Liberal-held regional Victorian seat of Corangamite, now notionally Labor on a margin of 0.03 per cent, almost 9000 voters claim an average of $2036 a year in cash refunds. The highest refunds were claimed by 5000 people in the regional Queensland seat of Flynn, held by the Coalition on a margin of just 1 per cent.

While Labor is unlikely to lose seats on the back of the policy, senior party sources have admitted it could have an impact in seats it is targeting to take from the Coalition.

National Seniors Australia chief advocate Ian Henschke said he had received no guidance from Labor about whether older Australians who had restructured their finances to receive the Age Pension would be exempt from the crackdown.

Within weeks of announcing its original dividend imputation policy last March, Labor backtracked under pressure from seniors groups, setting up a pensioner guarantee that quarantined those on government pensions or allowances with individual shareholdings.

“We have members who tell us that they are just sitting outside the pension at the moment,” Mr Henschke said.

“They are not pensioners, but they could adjust their affairs to get the pension so they can get the franking credits … we wonder whether the full amount that Labor says it will get from this is going to eventuate.”

SMSF Association head of policy Jordan George questioned whether the Labor policy would claw back the forecast $55.7bn in revenue over the decade. He said some SMSF trustees with assets under the part Age Pension assets limit of $848,000 could choose to hold their Australian shares in their own name instead of in an SMSF. This would allow them to qualify for the pensioner guarantee and retain their refundable franking credits, given that Labor imposed a cut-off date of March 28, 2018, under which SMSFs with at least one pensioner would be exempt from its crackdown.

“This is another example of how taxpayers can move assets around to avoid the application of Labor’s franking credit policy,” Mr George said. “The type of behavioural change will undermine Labor’s anticipated revenue gain.”

Mr Frydenberg accused Mr Bowen of arrogance. “Labor has arrogantly told over one million Australians to vote against Labor: people who have simply saved for their own retirement, people who are not necessarily rich, people who have taken personal responsibility to save for their retirement,” the Treasurer said.

“Australians’ retirement savings should be protected, not raided, as Labor is promising to do.”

Mr Frydenberg described Mr Bowen’s claim that the cash refund scheme cost taxpayers almost as much as was spent by the commonwealth on schools as a mistruth. “The truth is that Labor’s retirees tax on their own numbers raises $55bn over a decade while government spending on schools is over $307bn for the same period,” he said.

In response to questions from Labor MP Matt Thistlethwaite, the Parliamentary Budget Office, which costed the opposition’s policy, made clear in November that it had considered the possibility that some people might reduce their assets so that they were eligible for the Age Pension and therefore no longer subject to Labor’s policy. “The PBO’s assessment is that under current policy settings, there are already strong incentives for individuals to reduce their assets in order to qualify for the Age Pension, particularly for those with assets just above the threshold for the Age Pension asset test,” the PBO said.

“While a small number of individuals may choose to reduce their assets and qualify for the Age Pension as a result of the proposal, this would be unlikely to materially affect the costing.”

ATO data for 2015-16 shows the value of claimed franking credits peaks for both men and women over the age of 75 years. While the ATO measured the full value of franking credits claimed — not just those that were refunded in cash — it reveals that the demographic group that most benefits from them are older females. The ATO figures show that 170,614 women aged 75 and over claimed $1.2bn in franking credits worth an average of $6561. This compares to the 159,380 men aged 75 and over who claimed $955,109 in franking credits over the same period worth an average $5993.

The Australian

31 January 2019

Simon Benson, National Affairs Editor

Labor’s tax philosophy is based on an easily understood principle: tax those who aren’t your people and funnel it through to those who are.

It is a formula most often cloaked in terms of fairness and inequality.

So the extraordinary thing about Chris Bowen’s tax taunt yesterday was not so much what he said, but that he said it at all.

The opposition Treasury spokesman’s challenge to older voters that they don’t have to vote Labor if they don’t like his plans to take $55 billion in dividend imputation cash refunds from them, tore away that cloak. He may have been stating the obvious, but it was a rare articulation of Labor’s hostility to this demographic and the politics at play.

This is a new demographic division that pits two distinct groups against each other — self-funded retirees and working families.

Bowen would be the first to admit privately that this policy was a gamble from the start.

It took less than two weeks for it to be torn up and redrafted when it was pointed out by this newspaper that pensioners were also going to be dragged into the net and that, contrary to the policy’s claim, many of its beneficiaries were in no way rich.

Australian Taxation Office data shows that the most numerous group claiming tax credits on their Australian share dividends — but not necessarily the refunds — were women older than 75. The aggregate amounted to a value of about $1.1bn a year.

Labor is likely to get away with the cash grab, however. Only those who receive the refunds have any idea what in fact they are and how they work. As far as Labor is concerned, these are largely people who don’t vote Labor.

The assumption is that very few other people care and Labor is unlikely to lose a seat over this policy.

What senior Labor figures do now admit, however, is that a decent campaign by the Coalition on this could be the difference between Labor taking marginal regional Queensland seats from the Liberal National Party.

Labor’s policy gives the government the best chance yet to sandbag those seats where the Liberal Party base, the over-55s, still feel burnt by the Coalition’s super reforms.

None of this is in any way enough yet to force a reconsideration by Bowen or Bill Shorten on the policy.

It represents a quarter of Labor’s $200bn-plus spending program.

The Australian

31 January 2019

Robert Gottliebsen, Business Columnist

Suddenly cracks are appearing in the veneer that supports the ALP’s proposed retirement and pensioner tax. Under pressure on talkback radio, shadow treasurer Chris Bowen took an incredible risk. He conveyed a half-truth, gambling that his interviewer, Melbourne 3AW drive host Tom Elliott had not done his research and would not catch him out. Bowen’s judgment was right, and Elliott did not pick up the half-truth.

But the tense drama took on a surprise twist. Assistant treasurer, Stuart Robert was listening to Bowen in a car and, after the interview, rang Elliott to tell his listeners how Bowen had misled them.

Bowen had told Elliott’s audience that pensioners would receive their cash franking credit entitlement. It’s true that Australian pensioners with individual shareholdings will received their cash franking credit entitlement, but those on a part pension who have their shares in a self-managed fund will only receive the cash franking credit entitlement if they registered for the pension before March 28, 2018. If they registered after March 28, they lose their cash franking credits and so suffer the RPT.

Now that Elliott knows the truth Bowen and Bill Shorten are going to have to come up with a new set of lines that justify what to ordinary Australians is indefensible: levying a tax not on the basis of whether a person (albeit one with a self-managed fund) is entitled to be a pensioner, but rather when they registered for the pension.

And remember we are talking about cutting income from people who are on the government pension and who are not rich. Moreover, a big proportion are widows.

I am glad I am not an ALP candidate in the upcoming election trying to defend that action

But Bowen and his leader Bill Shorten face a further risk.

What if Tom Elliott, or any other talk show host, spend the time to really look at how the retirement and pensioners tax actually works? Elliott will discover that for the first time in Australia’s peacetime history the ALP plans to discriminate between people with the same assets and income.

Chris Bowen has declared a policy that all Australians — apart from those in SMSF who register for the pension before March 28 — should not receive cash franking credits. If he had implemented that policy and fixed the pension anomaly then, while I and many others would oppose the removal of cash franking credits, Bowen would be treating everyone the same. That’s a pillar of the Australian taxation system.

But Bowen and Shorten are attempting to smash that pillar, creating the most dangerous taxation precedent imaginable: blatant discrimination. .

Incredible as it might seem, the ALP has declared that if Australians have no taxable income but saved their money through an industry superannuation fund, or certain retail funds, then they are entitled to receive their cash franking credit refund entitlement “in full”.

That’s a total reversal of the base ALP policy.

The ALP clampdown only applies to those who have saved via self-managed funds. Those people will not receive a cent of their franking cash refund entitlement.

Remember we are dealing with people in exactly the same financial situation as those who receive their franking credits in full.

As I have written before, this blatant discrimination is the most outrageous tax proposal by a major party since Harold Holt in November 1960, when he proposed withdrawing tax deductibility for interest.

Shorten and Bowen defend their discrimination by saying that because the industry and big retail funds happened to have members who were salary earners and paid tax, those salary earners’ tax payments can be credited to the retirees so they can receive their corporate tax cash refunds.

That’s an insult to the intelligence of ordinary Australians. To mix up the taxes paid by one Australian with the tax status of an entirely separate person breaks all the rules.

It’s a complete nonsense.

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

The people affected by this are not the rich but ordinary salt of the earth Australians struggling to self-fund their retirement or lessen their reliance on the pension. To be fair to Tom Elliott, he really cornered the shadow treasurer on this issue. Elliott emphasised the fact that people have had their retirement plans in place for 20 years on the basis of cash franking credits. Elliott put so much social unfairness pressure on Bowen that he used a deliberate half-truth to help his position.

When Bill Shorten backed the cash franking credit ban, he thought the ALP was attacking the rich. Chris Bowen still maintains this is what will happen. I don’t agree.

There is no doubt that those with large amounts in superannuation used cash franking credits in past years, but Scott Morrison blocked that with a change in the superannuation tax system tax. That leaves the million plus Australians who are not rich, led by many of Australia’s widows, as the targets. The best way for Bowen to get out his mess is to look at the total franking system. A short fix is to impose a limit of if say $15,000 on access to cash franking credits. The problem is that would mean that nothing like $55 billion would be raised.

Correction | In an earlier version of the above commentary I did not distinguish between those pensioners who hold their shares in individual names and those pensioners who hold their shares via a self managed fund. This created the wrong conclusion that those pensioners who hold shares in individual names could miss out in their franking credit entitlement. That is incorrect.

The Australian

28 January 2019

James Kirby, Wealth Editor

Investors scrambling to avoid the Opposition’s looming clampdown on franked dividends are facing an uphill battle as property trusts — regularly cited as a safe alternative for income investors — are due to hit a wall of trouble in the months ahead.

Australian investors have traditionally depended on fully-franked blue chip shares, especially banks, to underpin investment income. But the Labor Party’s controversial plan, which scraps cash refunds to retirees who hold franked shares, is forcing many shareholders to seek new sources of income.

Advisers and brokers are constantly recommending property trusts (also known as A-REITs) since they are income-focused trusts where the dividends are taxed at the shareholder level. As a result there is no franking credit to be lost in this area.

But the news keeps getting worse for property companies — especially retail focused trusts, which represent roughly half the entire sector’s market capitalisation.

A potent combination of online retailing, fading consumer sentiment and falling house prices is creating ever more difficult conditions.

The headwinds are most intense among big names names such as Scentre, Westfield and Vicinity, where the questions run to the very future of shopping centres as we know them.

The Vicinity group stunned the market recently with an announcement it had voluntarily cut its own valuations for properties in its portfolio: the group, which owns the flagship Chadstone centre in Melbourne, is being dragged lower by clear difficulties in its less glamorous regional centres. Property analysts now expect further valuation cuts across the A-REIT sector with a focus on the shopping centre giants.

Sentiment in the property trusts is also being hit by rounds of increasingly negative forecasts for the housing market. The latest came this week from the CoreLogic group, which is now suggesting top-to-bottom price falls in Sydney and Melbourne of 20 per cent (from previous estimations of 15 per cent).

Though lower house prices are not an immediate worry for the A-REIT sector (which is less than 10 per cent residential), the potential negative effect on consumer sentiment is a real danger.

Shopping centres have always depended on department stores and large retail chains as anchor tenants. However, current difficulties faced by retailers as diverse as David Jones and Kmart mean that centre operators face increasingly difficult discussions when re-leasing negotiations emerge.

Growth projections for the wider real estate sector are already falling behind general industrial stocks, with industry-wide earnings per share growth for A-REITs expected to be about 4.8 per cent, against 5.4 per cent for industrial stocks.

For investors, the reality of moving out of bank stocks paying higher dividends — even before franking is taken into account — means the numbers involved in any switching of stock portfolios may simply not stack up.

Leading banks such as Westpac and NAB are currently offering forward dividend yields of 7.2 per cent and 8 per cent respectively. For many investors this will translate to a post franking dividend rate of 8 per cent to 10 per cent — this is an exceptional level of income return.

Meanwhile unfranked A-REITs are showing modest forecast dividend yields levels in the order of 6 per cent for groups such as Scentre and even lower at highly priced stocks such as Bunnings Warehouse Property Trust (4.8 per cent).

Finding a way to protect yourself from the looming changes in franking credits is not going to be easy. Certainly, rolling over investments into A-REITs at this time in the cycle would appear to be a risk rarely worth the effort.

The Australian

25 January 2019

Robert Gottliebsen, Business Columnist

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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