Category: Newspaper/Blog Articles/Hansard

Franking policy could trap funds

The Australian

7 May 2019

James Kirby – Wealth Editor

Some of Australia’s largest superannuation funds risk being caught out by Labor’s planned franking credit shake-up, despite claims they will be exempt from the $6 billion crackdown.

The changes mean super funds could find themselves in breach of tough superannuation rules that demand all members inside a fund are treated “equitably”.

Hundreds of thousands of retirees in funds who are in a pension phase are currently paid a “crediting rate”, which is designed to allow for the special tax status of pensioners who are entitled to franking credit refunds.

But the termination of franking credit refunds under Labor’s planned shake-up will mean funds will have to review how they pay members who are in the pension phase.

Just how any large super fund — including a retail fund — should distribute franking credits between retirees and non-retirees is now looming as a key issue.

“Everyone in the sector is currently trying to work this out,” said John Perri, a technical services manager at AMP.

If funds continue to pay retirees under the current arrangements, they could be allowing for a tax benefit that will no longer exist. This could upset members who have not retired but may find themselves cross-subsidising retired members.

The changes could put the funds in breach of rules to ensure all arrangements in super are “equitable”. But if funds reduce pension payments to adjust for the removal of franking credit refunds, retired members could be affected.

“There are a range of questions unanswered on the franking credits changes,” said John Maroney, chief executive of the SMSF ­Association. “It’s driving uncertainty across the sector.”

The developments came as Treasurer Josh Frydenberg yesterday claimed Labor’s franking credit plan is “starting to bite” in the polls. But in the treasurers debate in Canberra, shadow finance minister Chris Bowen said eliminating cash refunds to retirees who paid no tax was a matter of “fairness”.

Industry funds are generating fast-paced market share growth, partly on the widespread assumption their members will not be ­affected by franking credit changes. The Australian understands most big funds have decided to ­retain existing levels of payments to retirees even if the franking rules change. The bigger super funds have said they will not be ­affected by franking credit retiree refund changes because they have enough non-retired members who can benefit from franking credits (franking credits are not being scrapped, just franking credit ­refunds to retirees).

For example, the $140 billion AustralianSuper has more than two million members generating an income — that is in the accumulation phase — with just a couple of hundred thousand retirees on the accounts. Australian­Super told its members: “The proposed changes are not likely to have a material impact on the investment returns in either retirement or super investment options.”

At face value, the claim stands up at the “fund level” — the funds get franking credits and then use them to benefit members. But different individual tax exposures and investment choices mean the full impact will not be known until draft legislation is passed.

‘Kick up the backside’: Libs contemplate the unthinkable in Higgins

The Guardian Australia

4 May 2019

Gay Alcorn – Melbourne editor

Steve Stefanopoulos and his now husband, Craig, were on holiday in Vietnam when Malcolm Turnbull defeated Tony Abbott in the Liberal leadership spill in September 2015. The couple clinked champagne glasses over dinner in Ho Chi Minh city, toasting Turnbull’s ascension to prime minister.

“We saw him as a conservative progressive Australian leader,” says Stefanopoulos, 43, impossible to miss in a bright red jumper as he strolls by the upmarket cafes and galleries of High Street, Armadale, in Melbourne’s east. “Unfortunately, he got ousted … people are still upset about Malcolm not being in government and the way the whole thing happened.”

Stefanopoulos, 43, is the mayor of the city of Stonnington, a municipality in the middle of the electorate of Higgins. This is Liberal heartland. The party has held Higgins at every election since the seat was created in 1949. It’s the “leadership” seat – two prime ministers, Harold Holt and John Gorton, represented Higgins, as did the former treasurer Peter Costello. The prominent cabinet minister Kelly O’Dwyer is retiring at this election, and after a redistribution, the Liberals have a 7.4% margin.

Yet this is small “l” liberal Melbourne, turned off in recent days by Liberal candidates hastily disendorsed for homophobic and Islamophobic remarks
Almost 80% of this electorate voted yes in the same-sex marriage plebiscite, the seventh-highest result in the country.

Higgins is changing. It may include the city’s wealthiest suburb, Toorak, with its stately mansions and Mercedes in the garage, but apartments are popping up in South Yarra, and on its western fringe, Prahran is edgier and grungier, and increasingly Green.

Stefanopoulos is a swinging voter and is yet to decide who he will support. The environment is his first priority. “I want someone in government who really believes in climate change and is going to act on that.”

For someone who has lived here all his life, Stefanopoulos has a message: “It’s to the detriment of the Liberal party if they forget who their base level constituents are. They need to come back here to their heartland.”

Higgins is normally an afterthought at federal polls, but not this time. The biggest surprise at the November state election was not that Daniel Andrews’ Labor government won, but the collapse of the traditional Liberal vote in Melbourne’s inner east. The seat of Hawthorn, near Higgins, fell to Labor without the party even trying. Malvern, within Higgins, swung 10% to Labor. Tim Colebatch in Inside Story transposed the state results over federal boundaries and found that if people voted the same way, Labor would win Higgins, something it has never come close to before. It’s a big “if” – people distinguish between state and federal
politics – but for the first time, the Liberals are contemplating the unthinkable.

‘They’ve forgotten about us’

The state election was interpreted as the revolt of the faithful, that moderate Liberals were angry and embarrassed with the rightwing segment of the party that had for a decade resisted serious action on climate change, and stoked fears over social issues such as Safe Schools and “Sudanese gangs” in Melbourne

O’Dwyer reportedly told colleagues in the aftermath of the Victorian result that the Liberals were regarded as “homophobic, anti-women, climate-change deniers”, hijacked on social issues by “ideological warriors”. That might work in parts of Queensland, but not in progressive Melbourne.

John Ribbands is a barrister and president of the Prahran Junior Football Club. As the weak autumn sun sends shadows over the ground, he leans on the stadium banister and points to the apartments on the skyline. Middle-class families are moving in, and there are housing commission estates nearby too. The footy club is growing, especially with girls keen to play football, including Ribbands’ daughter. “We’re bursting at the seams. We have to turn kids away.”

On both sides, “they’re so focused on themselves, they’ve forgotten about us”. He’s a Higgins-style Liberal.

“If I had to nail my colours, I’d call myself a conservative with a social conscience. From an economic perspective, I’ve got concerns about Labor’s fiscal management. We’ve seen it over the decades, every time we have a change, you see the country goes into the red, and then Liberals come back in and bail them out of it.” And “to be perfectly blunt, I just don’t see Bill Shorten as the man to lead us on the world stage”.

He’s frustrated with the Liberals too. “[They] missed a wonderful opportunity to see themselves in government for the next 10 years by not electing Julie Bishop as their leader,” he says of the retiring former deputy leader. “The machinations which brought about the overthrowing of Malcolm Turnbull were led by Peter Dutton. It was internal infighting and no real consideration … about the future.”

Ribbands’ instinct is that the Liberals will come home on 18 May. The state result was about voters giving the party a “kick up the backside … frustration at the Liberals and where they’re at and what they’ve been doing” more than an endorsement of Labor.

Katie Allen hopes he’s right. The Liberal candidate ran at the state election in the seat of Prahran, which swung to the Greens. She’s a doctor of paediatrics at the Royal Children’s hospital, a researcher into childhood allergies, and has raised four children in the area. Allen, 53, is also independent-minded and outspoken, blaming the “federal fiasco” for the Victorian election. She is more diplomatic now.

“There were concerns about the issues that were playing out at the federal level and we did hear that,” she says, taking a break from handing out how-to-vote cards at pre-polling in Malvern. Since Christmas, people have been impressed with the Coalition’s “very strong economic agenda … a strong economy enables us to then invest in all the things that we need – health, education, infrastructure – but also a sustainable future.” On the day we meet, the party had disendorsed Jeremy Hearn as its candidate for the Melbourne seat of Isaacs. That he was even preselected was a sign of the ideological turmoil within the state branch.

The comments were “completely out of step and out of place and completely unacceptable” in Higgins or anywhere else, says Allen.

“I have progressive views having lived in Higgins for 40 years. When people say what sort of Liberal are you, I say I’m a Higgins Liberal. I am a product of my environment.”

Higgins is a three-horse race. In March, Labor, aware that the seat was a possibility for the first time, replaced its candidate with the prominent barrister Fiona McLeod SC, a former president of the Law Council of Australia who has headed up legal teams in the Victorian bushfires royal commission and the royal commission into institutional responses to child sexual abuse. The 54-year-old is also a campaigner for a federal anti-corruption commission.

But she has only had two months to campaign, doesn’t live in the electorate, and only joined the party a week before she was preselected. Labor’s vote was hopeless at the 2016 election, with just 14.95% of first preferences. It was tipped to second place by the Greens’ Jason Ball, who is standing again this time. But Labor barely tried last time and Higgins is now a target seat. McLeod, who wears a red jacket wherever she goes, exudes progressive passion.

“Many people I know who were once Liberal supporters are so angry with what’s happening at the federal government level on so many issues,” she says over the buzz of her campaign launch at a hip restaurant in Prahran. “Climate change, what’s happened to Malcolm Turnbull, the fact that we have a PM who walks into parliament brandishing a lump of coal, the fact that we’ve had people stuck on Manus and Nauru for six years now with no action, and these are my issues, too.

“The fact that the Uluru statement from the heart is dismissed out of hand without consideration. They realise the government no longer represents their values.”

‘The best chance we’re ever going to have’

McLeod has so much ground to make up, there’s a chance that Allen’s real competition may be Ball, the well-known LGBTI campaigner. The idea that the Greens could win a seat like Higgins seems preposterous, but he got 25% of the first-preference vote last time, and believes Labor’s increased interest could help him. Much of the state seat of Prahran, which is a Greens seat, is within Higgins, and there are pockets to the east of the electorate that are less rusted on Liberal.

Greens leader Richard Di Natale campaigns with Jason Ball, who says Higgins is a blue-green contest in a young and highly educated electorate.

Ball, 31, with his neat suit and boy-next door looks, was preselected more than a year ago, and has campaigned full time since November. He has 250 volunteers door-knocking and making phone calls, and has raised $250,000 in donations. This is a blue-green contest, he says, in a young and highly educated electorate.

“I feel like this is the best chance we’re ever going to have,” Ball says. “I don’t think Liberals will ever be this much on the nose. I don’t think climate change will ever be this much top of mind for the voters.

“I have never seen before this many people raise the environment and climate change with me, far more than the last election.”

One of them is Campbell Timms, 20, who stops to talk to Ball before voting. It’s Timms’ first federal election, and he’ll support the Greens. “I was mostly concerned about clean energy and the climate overall …. there’s lots more better alternatives to especially coal and better forms of energy development across Australia.” Over the next 20 years, he predicts, there’ll be more people like him. “It will be less of a safe Liberal seat.”

Campbell Timms, 20, at the pre-polling station in Malvern. He thinks Higgins will be less of a safe Liberal seat in future.

The Greens have the most aggressive policies on climate change, including shutting down all coal-fired power stations by 2030. Labor’s target to reduce greenhouse gas emissions by 45% is more ambitious than the Coalition’s 26% target, criticised by environment groups and climate scientists as too weak.

Allen says there are other issues in Higgins – population growth, infrastructure, health and education – but she’s aware of climate change, too. According to a Roy Morgan poll, almost 67% of voters in Higgins named climate as their top issue, the highest response for any Liberal seat.

“What I say to them [voters] is that it’s not just an environmental imperative, it’s an economic imperative, that we move to a future that is going to move us off fossil fuels. But they want to hear a sensible, practical response because after 10 years of arguments about this, they want to hear what the plan is … people in Higgins can see when there are false promises being made.”

If this is a generational election, at least some retirees in Higgins are not happy. Jack Hammond is a retired barrister, and a few years ago founded Save Our Super to protest the Coalition’s changes to superannuation, including imposing a $1.6m cap on the amount of money that can be moved into a tax-free super account. It was Kelly O’Dwyer’s policy and Hammond, 76, was furious, not because policies should never change, but because the Coalition had promised no changes to superannuation. For him, it was a matter of trust.

Malvern resident Jack Hammond will be disadvantaged by Labor’s changes to franking credit rebates.

He will be personally disadvantaged by Labor’s plan to end cash rebates for franking credits claimed by people who haven’t paid tax in that year. Labor says it’s a loophole that needs to be closed if it is to afford to spend more on services like cancer treatment and childcare.

“I’m not saying that governments should be precluded from ever changing laws,” says Hammond, “but when changes to superannuation policy and retirement policy in particular are made, there ought to be at the same time appropriate grandfathering provisions. It then remedies itself. Us old grey-haired people die and the younger people come through trusting the system.”

One of Melbourne’s most expensive streets is St Georges Street, Toorak. Labor’s policies will redistribute money from wealthier people in seats like Higgins

Gab Williams, an author, says the area is well-off and she’s happy for that shift to happen. “I feel like I live a comfortable life so I’m more concerned about making sure that people who don’t have so much are looked after.” Her father in law, though, is “really upset” about Labor’s franking credit reforms.

Local mayor Steve Stefanopoulos has never seen such attention on Higgins. Local radio stations set up outside broadcasts to gauge the mood. Ministers and shadow ministers are visiting. Millions are being pledged for sporting facilities and level crossing removals.

He believes all the major candidates are impressive, and he welcomes the contest. “Higgins has never been in play, never as far as I remember,” he says. “For some reason, we’re getting a change.”

Shorten’s $34b super gaffe

Australian Financial Review

16 April 2019

Andrew Tillett and Tom McIlroy

Scott Morrison has accused Bill Shorten of lying to voters after the Opposition Leader matched a government promise to not to lift taxes on superannuation or introduce new ones despite Labor policies adding up to a $34 billion hit on retirement savings. 

Amid growing fears within Labor ranks the election is tightening, the opposition scrambled to downplay Mr Shorten’s superannuation gaffe by clarifying the commitment meant no new or higher taxes than those already announced. 

Mr Shorten’s difficulties were compounded by an awkward press conference where he repeatedly refused to answer questions about the impact the opposition’s carbon emissions reduction policies would have on the economy.

Labor was also forced on the backfoot over revelations it had deleted dozens of paragraphs of details over its negative gearing and capital gains tax policies from its website.

Superannuation battlefield

Campaigning in the retirees’ haven of Victoria’s Bellarine Peninsula, which is in the marginal seat of Corangamite, Mr Morrison sought to sharpen the differences with Labor, as well as win back the Liberal base, by vowing no more tinkering with superannuation. “I make it very clear, no new taxes, no higher taxes on superannuation under my government ever,” he said. “This gives people certainty to plan for their future. It means that the goal posts will never be shifted.”

Under questioning at his press conference, Mr Shorten also ruled out hiking taxes on retirement savings. “We have no plans to increase taxes on superannuation. We have no plans to introduce any new taxes on superannuation,” he said. However, Labor has announced four superannuation policies ahead of the election campaign, which the Coalition estimates would see a $34 billion increase in tax over a decade, hitting hundreds of thousands of workers. 

One policy is to abolish catch-up concessional contributions, which currently allow workers with super balance of less than $500,000 to roll over the unused portions of the annual $25,000 cap on contributions for up to five years so they can pour more money into their funds. Another is removing tax deductibility for personal contributions under the $25,000 cap for self-employed workers such as tradesmen and women. Also on the cards is slashing the non-concessional contributions cap from $100,000 to $75,000, reducing a person’s ability to make a large one-off contribution to their super balance that could come from the sale of an asset or receiving a redundancy payment or inheritance.

Labor also wants to slug high-income earners by reducing the income threshold from $250,000 to $200,000 so they pay a higher 30 per cent tax instead of the concessional 15 per cent rate on contributions. 

‘Either lying or just forgotten’

Mr Shorten put forward these proposed superannuation changes in August 2016, describing them as “generously high-income loopholes”.

But Mr Morrison said Labor could not be trusted on superannuation. “I have no idea what Bill Shorten was talking about today when he says he won’t be putting increased taxes on superannuation. That’s his policy,” he said. “But I suppose, if you’ve already racked up $387 billion in higher taxes, he must have forgotten that includes $34 billion of taxes alone on superannuation. “When the number gets that high, he’s either lying about it today or he’s just forgotten the last person he hit with higher taxes.”

Labor’s campaign spokesman and finance spokesman Jim Chalmers said Mr Shorten’s commitment was referring to additional changes beyond those that had been “on the table for some time now”. “We have no further announcements to make on superannuation taxes in the campaign. So the policy that we announced some time ago we’ll take to the election,” he told the ABC. 

The Prime Minister rejected criticism of his own record on making unexpected superannuation changes, when as Treasurer he unveiled a number of changes to tackle what he described as “excesses” in the system at the 2016 budget that sparked a backlash among wealthy retirees.

“We have no plans to increase taxes on superannuation,” Bill Shorten said. Alex Ellinghausen “As I said at that time, once we dealt with them, then we were done with them. That’s why I can give the assurance,” he said. 

Mr Morrison unleashed his strongest campaign attack yet on Labor’s separate $57 billion plan to scrap franking credit refunds for retirees. Both Corangamite and Boothby in Adelaide where Mr Shorten campaigned on Tuesday have a high proportion of seniors. About 8500 people in Corangamite are beneficiaries of franking credit refunds and 8800 in Boothby.

Mr Morrison said the refunds were relied upon by retirees to help with the cost of living, such as private health insurance, electricity and even paying to travel to see family. “That’s what Labor’s retiree tax will take away and steal from Australians,” he said. 

Amid the cut and thrust of campaigning, traded barbs with a journalist after refusing to answer questions on the cost to the economy of Labor’s carbon emissions reduction policies, “I’m going to give your colleagues half a go,” Mr Shorten said. Mr Shorten also defended the deletion of information on Labor’s policies on its housing policy website, saying it was being updated. “As new numbers come to light, we update them. “

‘Complete rubbish’

The changed information comes less than a week after The Australian Financial Review revealed that Labor’s negative gearing could be overstated by between $2.5 billion and $8 billion due to inaccurate assumptions on the level of investment in new housing stock. 

Meanwhile, the Grattan Institute’s new “Orange Book” policy manifesto for the next government warns that increasing compulsory superannuation contributions, to 12 per cent from the existing 9.5 per cent of employee income, would lower wages by more than 2 per cent. “The people who will do worse will be low-income earners because they are the people whose wages are really being squeezed and will see their wages go up by not as much,” Grattan Institute chief executive John Daley said. The gradual increase in the superannuation guarantee is due to resume from 2021 and be completed by 2025 and is officially bipartisan, though philosophically more strongly supported by Labor.

Mr Morrison dismissed “complete rubbish” the institute’s claim on Tuesday the Coalition would need to cut spending by about $40 billion a year by 2030 to afford its big personal income tax cuts and deliver on its budget surplus forecasts.  But shadow treasurer Chris Bowen said report exposed how the government’s unlegislated tax cuts would bake in $40 billion of “secret spending cuts”. “This is the latest proof that the Liberals will cut schools and hospitals to pay for bigger tax loopholes for the top end of town,” he said.

Morrison vows ‘no higher or new taxes on super’

Australian Financial Review

16 April 2019

Andrew Tillett – Political Correspondent

Prime Minister Scott Morrison has pledged not to introduce any new or higher
taxes on superannuation as he attacked Labor’s policy to scrap franking
credit refunds.

Campaigning  in the retiree haven of Victoria’s Bellarine Peninsula, which is in the
marginal seat of Corangamite, Mr Morrison warned that Labor’s raid on their
nest eggs would limit their choice.

Prime Minister Scott Morrison and the member for Corangamite Sarah Henderson
attend a public forum with senior members of the community at the Springdale
Neighborhood Centre in Drysdale near Geelong on April 16, 2019.

Seeking to sharpen comparisons with Labor, which has proposed further
changes to superannuation, as well as to win back the Liberal base upset
over the Turnbull government’s changes targeting wealthier retirees, Mr
Morrison pledged no more tinkering with superannuation.

“Today I’m saying under my government there will be no higher taxes or new
taxes on superannuation,” he told a seniors forum in Drysdale. He said the
end of franking credit refunds, which the Coalition has
dubbed a “retiree tax” was the most “pernicious” of Labor’s tax increases.

Mr Morrison said the refunds were relied upon by retirees to help with the
cost of living, such as private health insurance, electricity and even
paying to travel to see family.

“That’s what Labor’s retiree tax will take away and steal from Australians,”
he said.

Labor has argued removing franking credits refunds is a matter of fairness
because recipients do not pay tax. The policy, which exempts pensioners,
will raise about $57 billion over 10 years but unlikely to win Senate
support.

Local member and junior frontbencher Sarah Henderson is facing an uphill
battle to hold Corangamite after a redistribution turned it into Labor seat
with a 0.3 per cent margin.”

Pension bill falling as super grows, Treasury’s MARIA modelling shows

The Australian

24 March 2019

Michael Roddan

Federal cabinet ministers have deliberated on confidential new Treasury modelling of the nation’s reliance on the Age Pension, which shows the amount of money spent on retirees will fall faster than previously expected, amid calls to dump the planned increase in the superannuation guarantee to 12 per cent.

The Australian can reveal the results of Treasury’s new modelling system, known as MARIA (Model of Australian Retirement Incomes and Assets), outlining the “adequacy and equity” of retirement incomes, has been provided to cabinet on several occasions in recent months, according to Freedom of Information requests.

The Treasury has been developing its MARIA model since 2017 in a generational overhaul of its systems, which provide long-term projections of Age Pension expenditure and take-up, superannuation savings, and the level of retirement incomes.

It can also be revealed that cabinet examined the effect of applying different concessional tax rates to super savings, according to separate requests sought under FOI laws, but the government decided against any move.

In the 2016 federal budget, the government capped tax-free pensions at $1.6 million, or $3.2m for couples, to limit the access wealthier Australians had to generous tax breaks in superannuation.

As previously revealed by The Australian, the unreleased MARIA modelling has found projections of the share of GDP Australia spends on the Age Pension is “consistent” with a fall of 2.7 per cent last year to 2.5 per cent in 2038 — significantly lower than previous estimates of the cost of providing the pension.

The Age Pension is the single biggest government expenditure at nearly $50bn a year. In 2002, the Age Pension cost 2.9 per cent of GDP and was forecast to rise to 4.6 per cent by 2042. But larger superannuation balances have seen that estimate lowered.

The government has been under pressure to scrap the ­planned increase in the superannuation guarantee from 9.5 to 12 per cent, which was partially frozen by the Abbott government.

The Grattan Institute has found increasing the rate would overwhelmingly benefit wealthier savers, hurt poorer workers by forcing them to put aside more of their disposable income for meagre increases in savings, and cost the federal budget an extra $2bn a year in tax concessions.

“The ‘currently legislated’ projections in the 2015 Intergenerational Report saw the Age Pension heading to more like 3.6 per cent of GDP,” said Deloitte Access Economics associate director Doug Ross. “With that in mind, the MARIA result is a bigger shift than you think.

“If true, those projections would be bad news for those still arguing for a lift in the SG rate to 12 per cent.”

Josh Frydenberg would not confirm whether the government was incorporating the new retirement modelling into the federal budget.

“The forecasts in the budget are based on the most current information and models available to the government,” the Treasurer said.

It is unlikely the federal budget will announce any major changes to superannuation or retirement incomes. The Actuaries Institute, which analyses long-term scenarios related to retirement income policy and financial services, was barred from joining the federal budget lockup this year as there were unlikely to be any announcements relevant to the group.

Sources familiar with MARIA said the results of the modelling could marginally affect the budget forecasts over the forward estimates, but would have a greater impact over the outer-year projections.

Treasury developed the model with the purpose of examining long-term effects of policy changes, which could estimate the impact of reforms out to 2050.

The effect of scrapping the increase in the super guarantee can also be modelled by MARIA, and sources said this was highly likely.

The Australian was blocked from accessing the contents of the documents as the information would “reveal a cabinet decision or deliberation”.

“One document was submitted to cabinet after having been brought into existence for the dominant purpose of submission to cabinet,” Treasury tax analysis division principal Matt Maloney said.

“Four documents, if disclosed, would reveal a cabinet deliberation or decision which has not been official disclosed.”

The Productivity Commission earlier this year recommended freezing the increase in the super guarantee rate and reviewing whether it would be equitable to force low-income workers to hive off even more of their salary into nest eggs, and whether the generous tax breaks in the super system have encouraged wealthier Australians to save any more than they would otherwise have done so.

Opposition Leader Bill Shorten and the union sector have attacked the government for delaying the increase to 12 per cent, which is scheduled to take place by 2025. The ACTU is pushing for a 15 per cent rate, in line with demands from the super fund industry.

Treasury modelling in 2013 found the government would continue to lose more revenue through concessional tax breaks in super than it saved in keeping self-funded retirees off the pension, with the loss extending out to 2070. Increasing the super guarantee rate to 12 per cent will result in the total super tax breaks adding more than 10 per cent to the nation’s debt by 2050.

The Grattan Institute found at the 9.5 per cent rate, the average retiree would receive an income of “at least” 91 per cent of their pre-retirement salary under current savings rates, well above the 70 per cent benchmark recommended by developed economies.

The independent think tank found that ending fee-gouging and driving better fund performance, or increasing the retirement age to 70, would result in far higher retirement incomes for all workers at the same time as taking pressure off the budget.

Michael Roddan – Reporter

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

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

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

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

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

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

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

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

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

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

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

Brine v Carter – executor was held not to be conflicted

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

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

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

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

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

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

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

Burgess v Burgess – sacred trustee obligations

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

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

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

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

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

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

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

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

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

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

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

Other important cases

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

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

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

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

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

SMSFs

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

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

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

Conclusion

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

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

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

For an article on succession planning strategies click here.

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

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

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

2 March 2019

Grotesquely unreasonable and SMSF trustees paying death benefits: Re Marsella

28 February 2019

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

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

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

Facts

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

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

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

The dispute

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

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

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

Questions for the Court

The key questions for the Court were:

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

Outcome

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

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

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

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

Key lessons

Many implications arise from the decision of Re Marsella.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lesson 4 — Importance of seeking advice

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

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

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

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

Lesson 5 — Planning for control after death

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

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

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

Conclusions

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

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

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

Labor ban hits small investors hardest

The Australian

28 February 2019

Michael Roddan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Retirees in the crosshairs

The Australian

21 February 2019

Bernard Salt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It’s hardly a glamorous lifestyle.

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

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

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

Darwin, Northern Territory

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

‘What I can’t abide is the discrimination’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Helensvale, Queensland

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

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

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

Tweed Heads, NSW

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

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

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

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

The Australian

21 February 2019

Eli Greenblat – Senior Business Reporter

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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