Category: Newspaper/Blog Articles/Hansard

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

The Australian

Samantha Bailey, Business Reporter

18 December 2018

Super members are on track for their first annual loss in seven years, following two
months of declines as market volatility continues to test global markets.

According to superannuation research company SuperRatings, super members
invested in the median balanced option made a negative return of 0.6 per cent in
November, following a 3.1 per cent decline in October.

Ongoing market weakness in December is likely to erode what’s left of the gains held
in median balanced funds by the end of the calendar year, which at the moment are
sitting on a return of about 1.8 per cent, SuperRatings said.

That is before investment fees, tax and implicit asset-based administration fees.
Super members who are only exposed to Australian equities suffered a worse decline
in November of 2.4 per cent, pushing them into negative territory for the year to date.

The local sharemarket is currently down almost 10 per cent for the December quarter,
in what is shaping up to be the worst December quarter since 2008.
The benchmark S&P/ASX 200 is currently down 7.8 per cent for the 2018 calendar
year.

Recent declines come on the back of concerns about slower global growth, which have
rocked already jittery markets.

Globally, markets were already volatile amid simmering trade tensions between China
and the US intensified after the CFO of Chinese telco giant Huawei was arrested
earlier this month at the request of the US government for alleged violations of Iranian
sanctions.

The last time super members experienced an annual loss was in 2011 when the median
balanced option returned a negative 1.9 per cent.
Super members with exposure to only Australian equities suffered declines of 9.6 per
cent that year.

SuperRatings estimates that between 60 and 70 per cent of Australians with their super
held in a major fund are invested in the default investment option, which in most cases
is the balanced investment option.

“Heading into 2019, it looks like members will need to get used to some of the
volatility we’ve seen in markets over the past two or three months,” said SuperRatings
executive director Kirby Rappell. “This is certainly a challenging environment for super funds at the moment.
“Share markets are under pressure globally, and recent data indicate that the economy
is weaker than expected, with downside risks including a softening housing market
having a real impact on confidence.”

Still, SuperRatings said members remain ahead over a 10-year period, with $100,000
invested in the median balanced option in November 2008 now worth $206,366.

Despite a volatile 2018, $100,000 invested in the median Australian Shares option in
2008 is now worth $230,482.

At about 11.15am (AEDT), the ASX 200 was trading down 1.2 per cent.

Samantha Bailey, Business Reporter

The Australian

James Kirby, Wealth Editor

18 December 2018

Big super funds which have been coasting on an extended post-GFC recovery are set
to be tested in the months ahead with much poorer returns looking likely this financial
year.

As super fund members have come to expect returns of 9 per cent plus per annum, this
year looks very different. If the books for the financial year were ruled off just now the
average balanced super fund would present a lower-than-inflation return of 1.8 per
cent (annualised inflation is running at 1.9 per cent.

All superfund managers would be well aware the last few years have been
exceptionally strong — after all the long term average for super funds is a modest 5.6
per cent per annum. But that will not make it any easier for big funds when explaining
to fund members why their annual contributions have been made into a sinking
market.

The poor numbers — which look like the worst since 2011 — will create different
tests for different fund formats. Industry funds, which have more unlisted assets, will
have new liquidity strains if members seek to take money out. Retail funds, from
banks and insurers, will be particularly exposed to an unfortunate combination of
losses in both the share market and the bond market. Separately, Self Managed
Superannuation Funds (SMSFs), which are traditionally overweight in cash and
Australian shares, will get support from cash holdings while share holdings will
almost certainly create a drag on returns.

The very poor first half of FY19 was confirmed by two leading researchers Chant West and SuperRatings. Ominously the SuperRatings report for November suggested:
“Ongoing market weakness in December is likely to eat away at what is left of super’s
gains through 2018”. While Chant West research manager Mano Mohankumar warned
“the flat result doesn’t come as a surprise given the stellar run super funds have
experienced since 2009.”

The most recent losses among super funds has been driven primarily by sinking share
markets. Though returns on Wall Street have regularly been better than the ASX, a
rising Australian dollar in the month of November created a negative result for
Australian investors in unhedged terms. Listed property investments, which can
smooth out broader share market volatility, did not help much either over the last few
weeks — Chant West says Australian-based property trusts were down in the most
recent period.

The majority of workers in Australia are in balanced funds, while a smaller number of
younger or less conservative investors opt for so-called growth funds which take on
more risk with the promise of higher rewards. Mohankumar at Chant West suggests
“with just two weeks of the year remaining, growth funds still have a chance of
finishing in the black.”

Growth funds have seen asset prices sinking fast in recent weeks, but a very strong
performance from shares earlier in the year could buoy the final numbers. As
SuperRatings numbers show despite suffering heavy losses in October (-5.8 per cent)
and smaller losses in November (-0.4 per cent) members invested in the median
international equities option have experienced returns year to date of 2.1 per cent.

The last time super members were hit with a negative year — in 2011 — the median
balanced option returned -1.9 for the year, while growth options were hit hard, median
Australian equities option dropped 9.6 per cent and international equities option fell by
6.7 per cent over the full year.

James Kirby, Wealth Editor

The Australian

James Kirby, Wealth Editor

15 December 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

James Kirby, Wealth Editor

The Australian

Joe Kelly, Political Reporter and Paige Taylor WA Bureau Chief

11 December 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

James Gerrard

1 December  2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

Robert Gottliebsen, Business Columnist

29 November 2018

I am very grateful to Chris Bowen, the shadow treasurer, and very likely the next
Australian treasurer, for opening up the debate on his dividend imputation proposals.

His comments are on The Australian ’s web site and were published in the print
edition of November 29. I urge my readers to look closely at the Bowen letter.
As I respond I want to ignore the emotive comments but separate the issues into clear
compartments.

First, I want to emphasise that I am an admirer of Chris Bowen, because he has had
the honesty to say what he plans to do well in advance of the election, so debates like
this one can be held outside the pressure cooker of an election campaign.

Second, I think a debate about dividend imputation is both healthy and well overdue.
The objection I raised in my commentary earlier this week was not about changing
imputation but rather the way it was being done.

Thirdly, I agree with Chris Bowen that on the basis of current figures available there is
a pile of money to be raised from rich people using his proposal.

My argument is that since those figures were compiled there have been changes to
taxation and rich people are flexible so they will escape the blows. My knowledge of
this comes because I mix with people and advisers who are just laughing at Bowen’s
proposals. This is a tax on battlers.

We can argue over who will be affected for ever and it is not until the legislation is in
operation that the winner of the debates will be known. There are bigger issues in this
tax so I pulled back and left it that we should agree to disagree to enable the debate to
be concentrated on the fundamental issues.

And these issues are so important that I want readers for the moment to theoretically
agree with Chris Bowen that the receipt of cash franking credits should be blocked.

It’s only when you look only at how the “ban” on cash imputation payments is being
executed that you see clearly that Chris Bowen has adopted unfair methodology.

So, ignoring our views on imputation, let’s sit down and look at what we should do to
block the receipt of cash franking credit refunds.

The first pillar that former Labor prime ministers would require is that the ban on cash
franking credits should apply to everyone, unless there is a clearly stated exemption
for, say, government pensioners.

And again the exemption should apply to all government pensioners, not just a
selected group. My objection to the Bowen plan is that it fails these basic fairness tests
that the former Labor prime ministers would have applied.

My sadness is that Chris Bowen in his letter did not address these fundamental criteria.
Instead it was all about attacking me. I have no problem being attacked but the
attacker must also address the issues.

And the fundamental issue is that a huge section of the non-government pensioner
Australian population will continue to receive their cash franking credits in full as they
currently do simply on the basis of the fund manager they have selected.

Once we decide that cash franking credits should be banned it is grossly unfair to
divide the population on the basis of who they choose to manage their money.

If my savings are in the superannuation system in pension mode and I want to
continue to receive my cash franking credits, all I have to do is transfer my money
from my current large fund that is caught or from my self-managed fund to an industry
fund (or big retail fund).

My money stays in superannuation and simply by changing fund manager I continue
to receive all my cash franking credits. And the industry funds have been performing
well so I am not being penalised on the fund return comparison.
There is no way such legislation can be fair. How are the industry fund managers able
to continue to provide my cash franking credits while other managers can’t do it?
The industry funds have a vast army of Australian members who are wage and salary
earners whose superannuation is not in pension mode.
The industry and big retail funds “sponge” on those workers by using the tax they pay
to offset against the retirees’ non-tax status.
The fund manger is able to net off two entirely separate tax situations. If my money
happens to be in a fund that does not have enough salaried workers then I lose my
franking credits.

This is blatant discrimination so it would seem there is clearly another agenda. I won’t
spell out what agenda might be but readers can make a fair guess.

If Chris Bowen’s only agenda was to stop the payment of cash franking credits then
everyone who receives them must lose them. Then it’s a fair tax.

That still leaves the government with the ability to legitimately exclude those on the
government pension—they can still receive their franking credit entitlement in cash.

But again, under the Bowen plan there is discrimination —-a portion of government
pensioners miss out because those in self-managed funds discover there is cut off date,
March 28. All those in self-managed funds who became entitled to the government
pension after that date do not receive their cash franking credit entitlement.

When you tell the population that they can continue to receive cash franking credits by
changing fund managers or being born on the right date then clearly cash franking
credits aren’t your only target.

If the key agenda is to concentrate superannuation in a few hands then be bold and say
that upfront rather, than using cash franking credits as a smokescreen.

And the real debate should be about the total issue of franking credits.

Again, as treasurer of Australia, if you believe the system is too generous then be open
about it and tell Australians your view and we will debate it.

Maybe we will then reduce the franking credit entitlement from 100 per cent to, say,
95 per cent.

Then everyone pays and the tax is not just levied on a select group of people who
happen have saved outside industry superannuation funds.

ROBERT GOTTLIEBSEN, BUSINESS COLUMNIST

The Australian

James Gerrard

24 November 2018

If the ALP comes to power and delivers on its threat to scrap cash rebates on franking
credits, what could you do?

An investor might reframe the question in this manner: is it better to take drastic action
and sell down all self-managed superannuation fund assets, transferring the wealth to
the investor personally and in so doing remove the cost, administration and trustee
responsibilities attached to running a SMSF?

After the public uproar that resulted from the initial policy announcement, Labor
revised its proposal to allow SMSFs with at least one member receiving a Centrelink
pension or allowance as at March 28, 2018 to continue to be eligible for cash refunds
of excess franking credits. The outstanding problem with the policy proposal is that it
discriminates against people in the middle. People with low income and assets are
exempted and people with significant assets in super are only partially affected.

The reason the rich continue to benefit is that with the relatively recent balance
transfer caps, only $1.6 million can be held in a tax-free super pension per person.

For those with money in super above $1.6m, the excess needs to be held in the super
accumulation account, taxed at up to 15 per cent on income and gains.
In other words, because the ultra rich will still have significant funds in the super
accumulation account that attracts 15 per cent tax, they will continue to use franking
credits to reduce tax on the accumulation account, and therefore may be largely
unaffected by the policy change.

But it is the people in the middle who are hardest hit, deemed too wealthy to receive
Centrelink benefits, but not wealthy enough to have more than $1.6m in super. They
feel the full force of the Labor imputation credit changes.

For the $1m SMSF with a retired homeowner couple as trustees and members, they’re
over the threshold of $848,000 to receive a part age pension, and thus targeted by the
Labor policy proposal. If they held 25 per cent of the super fund in fully franked
shares paying an average 6 per cent dividend, that equates to franking credits of about
$6500 a year at risk of being lost.

Some SMSF trustees may cop it on the chin, while others may close the SMSF and
deal with the money outside super. (This example is typical; the average cash refund
cheque is close to $6000).

Exploring that path in more detail, if the investments are transferred out of super into a
joint personal investment account and generate an average income return of 6 per cent,
with 25 per cent of the income being from fully franked dividends, that equals
grossed-up taxable income of $66,428 including $6428 of franking credits.

If each spouse is allocated half of the income, $33,214 per spouse, tax payable is
$2872. After franking credits are applied, there is no tax payable, with $342 in
franking credits still to spare.

The big drawback to this approach is that you’re now exposed to capital gains tax
personally. So it depends on how you manage your investments as to whether this
approach works for you.

If there is moderate turnover of the portfolio with gains being realised each year, not
only will your investment income be taxed, but you may end up with a large tax bill
due to realised capital gains.

Another consideration is that the policy may change over time. Labor may further
water down the policy or even reverse it.
If it works out best to hold money inside super in future, irreversible damage would
have been done by those who shunted money out of super, which, due to a
combination of contribution caps and work tests for those over 65, makes it extremely
difficult for people to get money back in super down the track.

And it doesn’t stop there. Estate planning also needs to be considered.
As you can see, what appears a simple policy announcement will have an enormous
ripple effect on millions of people in retirement and for their children.

In summary, there are so many variables that working out the best outcome, both now
and into the future, is confusing and highly mathematical.

The policy is estimated to bring in $59 billion in savings over the next 10 years for
Labor.

But the people most likely to be affected are not the mega-wealthy but the hardworking
mums and dads who diligently contributed into super over the past 20 years
under the assumption it would be a protected environment that would allow them to
draw an income stream in retirement.

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