Aaron Hammond

The Australian

24 January 2019

Michael Roddan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

Eli Greenblat

24 January 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

Eli Greenblat

24 January 2019

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

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

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

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

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

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

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

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

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

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

“It is a big concern,” he said.

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

He described the ALP policy as a poor one.

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

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

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

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

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

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

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

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

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

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

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

The Australian

Robert Gottliebsen

22 January 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

Anthony Klan, Journalist

19 January 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

Geoff Chambers, Canberra Bureau Chief and Joe Kelly Political Reporter

27 December 2018

Older Australians have delivered an early blow to Scott Morrison’s pitch to win back
their support before next year’s federal election, with 45 per cent of voters aged 50
and older declaring they are dissatisfied with the Prime Minister’s performance.

Despite achieving an initial boost in support from older voters, who had never strongly
endorsed Malcolm Turnbull as prime minister, Mr Morrison suffered a decline in
satisfaction ratings in the latest quarterly Newspoll analysis.

Josh Frydenberg is trying to fight a rearguard action on Labor’s “retiree tax” and
negative gearing policies, but the government’s efforts did not result in a polling boost
before the summer break.

The inability of the federal government to lock in the votes of baby boomers — who
have become disillusioned with both major parties, prompting some to shift their
support to minor parties — will be the most concerning revelation for Liberal and Nationals strategists in the latest Newspoll data.

The quarterly analysis, covering late October to this month and conducted exclusively
for The Australian, shows that almost one in two voters older than 50 would vote for
the Coalition or Pauline Hanson’s One Nation, with only 37 per cent locking in behind
Labor.

The shift of support to One Nation, which had a 9 per cent primary vote among those
50 and older, compared with 1.8 per cent immediately before the 2016 election, could
put at risk the Liberal National Party’s hold on seats in the battleground state of
Queensland. This would toughen Mr Morrison’s job of clawing back Labor’s lead in
the polls before the likely May election.

Bill Shorten also faces a damning report card from older Australians, with only 31 per
cent satisfied with his performance and 59 per cent issuing a negative appraisal of his
tenure as Opposition Leader. However, this is Mr Shorten’s best satisfaction rating
from voters aged 50 and older in the past 12 months.

On the primary vote, the Coalition edges Labor 40 to 37 in the 50 and older voter
category.

Off the back of early childhood and education policies aimed at younger families, Mr
Shorten’s Labor continues to dominate the 18-34 and 35-49 age categories, amassing a
sizeable lead in the primary vote over the Coalition.

There has been a significant spike in dissatisfaction with Mr Morrison in the 35-49 age
segment, with 48 per cent saying they were unhappy with his performance, up from 42
per cent in the August-to-October analysis.

The same voter group rated 50 per cent dissatisfied and only 36 per cent satisfied with Mr Shorten’s job as Opposition Leader.

On gender breakdown, 43 per cent of men declared they were satisfied with Mr
Morrison’s performance as Prime Minister, compared with 39 per cent of women.

There were 46 per cent of men and 44 per cent women who were dissatisfied with his
performance.

Mr Shorten continues to struggle with female voters, 49 per cent of whom are
dissatisfied with his performance compared with 34 per cent who are satisfied. Fiftytwo
per cent of male voters rated Mr Shorten’s performance as dissatisfactory, while
38 per cent were satisfied with him.

Asked to compare the two leaders directly, Mr Morrison holds a large lead over Mr
Shorten on the question of who would be the better prime minister among those aged
50 and over, 50 per cent to 32 per cent, and a narrow lead, 42-36, with 35-to-49-yearolds.

Men and women both rate Mr Morrison the better prime minister. Mr Morrison had a
10-point lead with women, 43-33, and an eight-point lead with men, 45-37.

After losing support from older Australians over superannuation changes, the Coalition has attempted to heap pressure on Mr Shorten over what it describes as a
“retiree tax”, a major revenue-raising measure announced by Labor to scrap the
refundable tax credits on shares.

The system of cash refunds, implemented in the 2001 budget, allows super funds and
individuals to receive payments from the Australian Taxation Office if their dividend
imputation credits exceed their total tax liabilities. Labor’s plan to scrap the refunds
would raise $55.7 billion over a decade from next July but was initially estimated to
raise $59bn before Mr Shorten was forced to carve out pensioners from the crackdown
following a backlash from seniors groups.

Mr Shorten’s so-called pensioner guarantee means that government pensioners and
allowance recipients will be protected from the abolition of cash refunds for excess
dividend imputation credits if he wins the next election.

The biggest target of the Labor policy is self-funded retirees. Estimates suggest that
about 33 per cent of cash refunds go to individuals, 60 per cent to self-managed super
funds and about 7 per cent to APRA-regulated funds.

The Coalition has tried to garner support off the back of its campaign against the
dividend imputations reform, targeting key electorates with older voters.

Another major revenue-raiser that has unsettled older voters is Labor’s negative
gearing policy, which will see Mr Shorten limit the concession to new housing stock if
he wins office — a move estimated to raise $20bn over the decade.

The plan to halve the capital gains discount is also thought to raise about $13bn over
the same period, with the measures fuelling concerns they will exacerbate an already
softening housing market.

The Australian

Robert Gottliebsen, Business Columnist

24 December 2018

On the day before Christmas this letter goes to Bill Shorten, who according to the
opinion polls is the 2019 prime minister-in-waiting, plus his would-be treasurer Chris
Bowen and Ged Kearney, who is the member for the northern Melbourne seat
formerly known as Batman that has been renamed Cooper.

Bill Shorten is deservedly way ahead in opinion polls, firstly because he has held his
party together for five years when his opponents split and secondly because he and
Chris Bowen announced key policies way ahead of time.

In office, like the Coalition, the ALP will have policies that create disagreement.
That’s part of our democracy.

But in 2019, the community wants stability so once again we can respect the office of
prime minister.

We have had nine years of chaos. Australia wants policies where, even if we disagree,
there is community fairness.

I put Ged Kearney on this Christmas list because in November she took time to
understand that one of my readers — an ex-teacher — was a victim of the proposed
retirement and pensioners tax (RPT) that removes cash franking credits from selected
people. I really appreciated that.

There are hundreds of thousands of battling victims of RPT, but the letter I have
chosen to highlight comes from Bundaberg’s Boo and Lizzie Nitschie, who are not battlers. They both worked hard to be independent of government pensions. Boo is good at picking shares, but his superannuation fund will lose its franking credits unless he shifts the management of his money to the ALP’s mates in industry superannuation funds or selected non-industry funds.

For doing the “right thing” and replacing himself as manager, he will be rewarded by
receiving his cash franking credits entitlements in full.

Taxing on the basis of who manages a person’s money is simply not fair. Some of
Boo’s mates are on government pensions and will get their cash franking credits
entitlement. But others were not entitled to register for the government pension by
March 28 so while they will be pensioners, they will not get franking credits. Taxing
legitimate government pensioners in such an indiscriminate way is again simply not
fair

Boo’s letter defends franking credits and in my view he is right. But Chris Bowen and
Bill Shorten are entitled to have a different view and policies. But if they are to have
respect in the commodity, they must be fair in the way they implement those policies.

The Christmas before the election is a time for Bill, Chris and Ged to recognise the
unfairness of the way they are implementing their policy. And they might even
discover there are better ways to handle imputation credit entitlements. But that’s a
separate issue.

Over to you Boo (and thanks for the compliment):

Dear Mr Gottliebsen,
Thank you for your continuing efforts to expose the inequities of federal Labor’s
policy to abolish the refund of excess franking credits.

My wife and I retired from the work force several years ago.

I would like to tell you why we think this policy is so unjust. Twenty years ago, we
could see that access to the age pension was going to become increasingly
problematic, so we made the decision to fund our own retirement.

We reduced our lifestyle somewhat, living on one income and investing the other in
the Australian sharemarket.
Shorten franking policy must be fair to retirees https://www.theaustralian.com.au/business/opinion/robert-gottliebsen/…

We chose to invest in equities because I had some knowledge of the sharemarket but
would be a “babe in the woods” in the property market. As shareholders, we own a
share of the companies we invest in. It follows that we also own a share of any profit
or loss the companies may make. We pay others to manage these companies. These
managers determine how much of the profits (typically 60-80 per cent) they will
distribute to us as dividends. But first they must pay 30 per cent of our profits to the
tax office as company tax and the remaining 70 per cent is available to pay us our
dividends along with a credit for the 30 per cent tax that have paid on our profits.

My wife and I currently each received about $35,000 in (grossed up) fully franked
dividends per annum consisting of $24,500 in actual dividends and $10,500 in
franking credits. As this is our only source of income, we each have a tax liability of
approximately $3500.

The balance of the franking credits ($7000 each) is refunded to us when we lodge our
tax returns. Obviously, the value of the shareholding underlying this number of
dividends precludes us from any entitlement to the age pension.

If the refund of excess franking credits is abolished, we will both pay tax of $10,500
on our $35,000 taxable investment income. If we were still earning personal income
(pre-retirement) of $35,000 each per annum our tax liability would be $3500 each —
the difference in tax liabilities ($7000) is not a retirement tax. It is a retirement
SUPER TAX! And Mr Shorten still goes on about fairness.

Imagine the outcry of every wage-earner had to pay a minimum of 30 per cent tax on
every dollar they earned regardless of their actual income (and sorry no tax return for
you!).

Yours sincerely,
Boo (Selwyn) Nitschie
Bundaberg, Qld

Robert Gottliebsen, Business Columnist

The Australian

Judith Sloan

22 December 2018

Don’t you hate those earworm songs? You know — the ones you just can’t get out of
your head. There is even a technical term: stuck song syndrome.
Cliff Richard’s Summer Holiday is one of my examples: “We’re all going on a summer
holiday / no more working for a week or two / fun and laughter on our summer
holiday / no more worries for me or you / for a week or two.” Stupid words, irritating
tune.

But as many of us take a summer break over summer, it could be worth spending some
time thinking about what a Shorten Labor government will mean for you, your family
and the country. And let’s not forget one of Paul Keating’s more memorable
campaigning messages: “When the government changes, the country changes.”

Earlier this week, The Australian columnist Nick Cater undertook a forensic
comparison of the Labor Party’s platform in 2007 just before the election of the Rudd
government and the current platform endorsed by the party’s biennial conference this
week in Adelaide.

He notes that there are now 43 “enduring values” in the Labor platform compared with
only 11 in 2007. Back then, working families were given top billing and Kevin Rudd
told us that he was a fiscal conservative at heart. Individual aspiration was even
mentioned.

Today, individual aspiration is out, replaced by no one being left behind. It’s the “fair
go” vibe.

Rudd was never a union man but, under Shorten, government policy will be
implemented via the “the timeless truth of solidarity … alongside the mighty trade
union movement”. That would be the mighty trade union movement that commands
only 15 per cent coverage of workers and less than 10 per cent in the private sector. (It
was 19 per cent in 2007.)

Labor is far to the left of the policy platform it took to the 2007 election. While
determined to run a competent administration, the primary concerns of Labor today
are bound up in identity politics, inequality, redistribution, climate change and social
issues such as domestic violence and the treatment of refugees.

Gone are the days when Labor focused on the factors that would promote wealth
creation (free markets, limited government, light regulation of the labour market,
incentives for hard work and investment), thereby laying the groundwork to assist the
most disadvantaged in the community.

Nowadays, Shorten is keen to use the organising principle of inequality to increase the
size of government, to add to the overall burden of tax, to touch up higher-income
earners and companies, and to spend big on health, education and welfare.

The fact that evidence on inequality in Australia points to a middle-level pegging by
international standards and no obvious recent trend towards greater inequality doesn’t
seem to concern Shorten and his team. Maybe evidence-based policy is so yesterday
for Labor — another case of the vibe.

Also in the background is the unproven and improbable theory of Labor Party
president and former treasurer Wayne Swan that aggressive redistribution of income
and wealth by a central government will lead to higher rates of economic growth.

Having failed as treasurer, he is still around to try to destroy public finances and
impede economic prosperity.

Let’s take a look at some of the ingredients of the Labor “fair go” approach. It should
be pointed out that Labor has not sought to hide what is being planned in the event of
an electoral victory.

Labor has no intention of placing a cap on the tax take as a percentage of gross
domestic product (the Coalition’s figure is 23.9 per cent) or on government spending.

There is scant regard that spending on education, for instance, represents a case of diminishing returns and that there are trade-offs to spending on education rather than on other ends. If a lot of spending is good, more must be better: that’s the basic thinking of Treasury spokesman Chris Bowen.

To finance the planned splurge in federal government spending, Labor’s tax plans
involve significant increases in expected revenue. The combination of the changes to
negative gearing and capital gains tax and the elimination of cash refunds for excess
franking credits alone are expected to raise an additional $100 billion across a decade,
although these figures are rubbery.

Depending on what Labor decides to do about future company tax and personal
income tax cuts foreshadowed by the Coalition government, there is considerable
scope for even more spending while maintaining the semblance of budget balance —
even repair.

Mind you, in the past, Labor would have regarded major changes to tax arrangements
to be about much more than raising more money. Keating, for instance, introduced
capital gains and fringe benefit taxation to make the tax system more efficient (as well
as more equitable.) Micro-economic reform is so passe for today’s Labor Party.

Consider the radical decision to eliminate negative gearing for all assets apart from
new residential real estate. Since the policy announcement, it has become less clear
what outcomes Labor expects to achieve from the change — well, apart from raising
more money.

Initially, it was all about promoting housing affordability, but Labor has since walked
away from any proposition that there will be any significant impact on house prices.

Bowen also has been keen to dismiss any impact on rents. This is notwithstanding the
fact that the economics are clear-cut: an upward sloping supply (of rental
accommodation) curve with supply dependent on post-tax returns will lead inevitably
to higher rents across time.

Then there is the highly controversial policy to eliminate cash refunds for franking
credits — a policy position Bowen may well be regretting.

During the past several years, it has become clear that Bowen takes many of his riding
instructions from former Labor treasurer and prime minister Keating. Keating’s advice
is simple: if he didn’t do it, it must be bad. He didn’t have cash refunds, cash refunds
are bad.

Sadly for Bowen, this self-serving guidance is not only out of date but extremely
misleading. When dividend imputation was introduced, it hardly mattered that cash
refunds were not part of the deal. The tax-free threshold was extremely low and it was
many years before a significant number of retirees would be in receipt of tax-free
income sourced from superannuation.

There is absolutely no logical reason cash refunds should not be paid out when
franking credits can be used to reduce taxable income. There is absolutely no
difference in terms of the fiscal cost.

Bowen has got himself into a terrible pickle. He also has dug himself a bigger hole by
exempting those on any Age Pension as well as offering a free pass for members of
industry super funds but not those in self-managed superannuation funds.
Interestingly, the negative gearing changes and the elimination of cash refunds for
franking credits appear to be reasonably unpopular with significant segments of the
electorate. Arbitrarily hurting some voters who are not all high-income earners while
leaving others unaffected is a difficult political sell.

I have touched on only a small number of the far-reaching changes that will be
ushered in by a Labor government. While you are enjoying your summer holiday, you
may find your mind drifting to another song: The Times They are a-Changin’.

Judith Sloan, Contributing Economics Editor

The Australian

David Rogers, Markets Editor

22 December 2018

Australian shares are on track for their worst year since 2011, with most investors
facing double-digit losses as confidence in the global economy falters.

Local shares are set to be joining emerging markets and Japan in a bear market for the
first time since 2016. At the same time, a 12 per cent fall in the past three months
marks the worst December quarter for Australian equities since the global financial
crisis erupted in 2008.

The losses come on the back of a wild week in markets that saw further big falls in
shares and crude oil and a rush for safe haven assets including government bonds,
gold and Japanese yen.

The benchmark S&P/ASX 200 hit a two-year low of 5426.6 points before ending
down 0.7 per cent at 5467.6 yesterday.

The falls come on the heels of further sharp losses on Wall Street and renewed selling
in Asia. Japan’s Nikkei Stock Average yesterday closed 1.1 per cent lower at a fresh
15-month low, and China’s Shanghai Composite Index was down 0.8 per cent.

Last night futures pointed to opening losses for Wall Street’s S&P 500 and the Dow
Jones Industrial Average of 0.4 per cent and 0.3 per cent, respectively.

Deteriorating relations with China also weighed on sentiment after Beijing warned
Australia and other US allies that they risked damaging their relations by backing US
allegations that the Chinese government had been behind global cyber hacking and
intellectual property theft.

After Australia expressed “serious concern about a global campaign” of cyber hacking by a group said to be acting on behalf of China’s Ministry of State Security, China’s
Foreign Affairs Ministry warned that countries should “stop deliberate defamation of
China, so as not to damage their bilateral relations and co-operation in important
areas”.

Beijing said the allegations “severely damaged China-US relations”, casting more
doubt on hopes that the retaliatory tariff increases would not go ahead after the trade
war “ceasefire” ends on March 1.

“Trade war technicals and geopolitics remains at the top of the list of concerns that
could upset the global economy in 2019,” Morgans chief economist Michael Knox
yesterday. “The ongoing US-China trade dispute could persist.”

Elsewhere, brokerage Bank of American Merrill Lynch said the US-China trade war
was “the main reason for market weakness this year”.

Among China-exposed stocks in Australia, Navitas fell 2.3 per cent, a2 Milk fell 1.6
per cent, Bellamy’s lost 3.6 per cent and Fortescue Metals slipped 1.5 per cent
yesterday, but Treasury Wine Estates rose 1.5 per cent, BHP was up 2.3 per cent and
Rio Tinto rose 0.7 per cent.

Although there was no broad sell-off in China-facing stocks, the tension fuelled
negative sentiment.

Still, this added to an already volatile week where global shares dived after the US
Federal Reserve said “some further gradual hikes in interest rates” and quantitative
tightening on “automatic pilot” would be consistent with sustained economic
expansion after it lifted rates and trimmed its rate projections.

The S&P 500 had its worst reaction to any Fed meeting since 2011 and, in a sign that
the longest US bull market in history may have already ended, the Dow Jones
Industrial Average was down 10.5 per cent for the month, its worst December since
1931.

Rising bulk commodity prices lent support to the Australian resources sector, although
West Texas crude oil dived more than 10 per cent to an 18-month low of $US45.67 a
barrel after record production from the three biggest producers in recent months.

Plunging oil prices may also be a canary in the coal mine for the global economy, with
a 40 per cent fall in the past three months reminiscent of the savage decline that
preceded the 2016 bear market in shares.

Underscoring the demand for safe-haven investments amid concern that economic
growth will slow due to lessening central bank liquidity, the US-China trade war,
slowing credit growth and a rapidly cooling housing market in Australia, 10-year bond
yields hit an 18-month low of 2.33 per cent, while the price of gold and the Japanese
yen hit multi-month highs.

After its fall this week, the S&P/ASX 200 index was trading on a 12-month forward
price-to-earnings ratio of 13.7 times, the cheapest PE valuation in almost four years
and significantly below its decade average of just over 14 times. The forward dividend
yield of the index rose to 5.3 per cent, the highest in two years.

From a decade high of 6373.5 points four months ago, the Australian sharemarket has
now fallen almost 15 per cent, its biggest correction — defined as a fall of at least 10
per cent — since 2015-2016.

The local bourse is now just 5 per cent off a bear market — defined as a fall of at least
20 per cent.

But analysts said a sustained bear market was not justified as a global recession was
not imminent.

“The risks remain skewed to further weakness into the early part of next year as
uncertainty remains regarding global growth and investor sentiment looks like it’s still
not fully washed out,” said Shane Oliver, head of investment strategy and chief
economist at AMP Capital.

“However, we remain of the view that this will be more likely part of a ‘gummy bear’
market that leaves shares down 20 per cent or so from their highs a few months back
after which they start to rally again — like we saw most recently in 2015-16 — rather
than as part of a long and deep ‘grizzly bear’ market like we saw in the global
financial crisis.

“The main reason for this is that we don’t see the US, global or Australian economies
sliding into recession anytime soon.”

David Rogers, Markets Editor