Committee Secretary Standing Committee on Economics PO Box 6021 Parliament House Canberra ACT 2600
Inquiry into the implications of removing refundable franking credits
I would like to present to the enquiry, two emails sent by me to ALP leaders and one reply received from an ALP leader concerning the Labour proposal to axe franking credits to individuals paying no income tax. In my emails I set out my real concerns if the Labour proposal is introduced.
Email No 1 Sent to Bill Shorten, Leader, ALP on 15 March 2018
From: Sent: Thursday, 15 March 2018 11:25 PM To: Shorten, Bill (MP) Cc: Plibersek, Tanya (MP); Bowen, Chris (MP); Albanese, Anthony (MP) Subject: Labour Proposal to Axe Franking Credit Rebates to Individuals Paying No Tax
Dear Mr Shorten
I refer to your recent announcement of a proposed policy to axe franking credit rebates for individuals paying no tax if Labour wins the next election.
There has been much talk about the top 10% of very wealthy individuals receiving 90% of the total franking credit rebates paid to non-taxpaying individuals. There has been talk about non-taxpaying individuals in self-managed superannuation funds There has also been talk of the minimum effect of this proposed policy on pensioners and part-pensioners. But there has been little or no talk about the major effect of this proposed policy on retired people in my and my wife’s position.
Our assets and income are above the Centrelink pension thresholds, so we are not full or part pensioners, but we do qualify for the Commonwealth Seniors Health Card with limited benefits. We are aged 69 and 68 years respectively and provide for ourselves in a modest but comfortable lifestyle in retirement. We do not have a self-managed superannuation fund, but we are in an industry superannuation fund from which we draw a monthly pension. In addition, over many years, we have invested our savings in the share market concentrating on quality shares to provide income and growth. This is sound income planning for retirement. We did this with the encouragement of the government, both Coalition and Labour, to provide for ourselves in retirement. Together, we received approximately $7,000 of franking credit rebates which represents about 10% of our income. The loss of $7,000 of income would significantly effect our spending patterns and our lifestyle. In retirement, we have limited means to recover from significant hits to our income stream, such as the one proposed.
A carryon effect of the proposed policy, is that many retired people similar to me and my wife may be forced to sell shares to maintain a similar income stream for a modest , comfortable lifestyle, ( and there will be some panic selling), potentially forcing the share prices down. So we will receive less money for our shares than previously expected and budgeted for. Inevitably, over time, more retirees will seek the support of a part pension, costing the government money.
The fact that 10% of individuals receive 90% of the total franking credit rebates paid to non- taxpaying individuals has been highlighted by you. So if the Labour party is aggrieved by some
1 individuals receiving very high amounts of the rebate, put a cap or sliding scale on the franking credit rebates as happens with so many other government programs.
Please drop your proposal to axe franking credit rebates for individuals paying no tax.
Yours faithfully
Email No 2 Reply to my email from Tanya Plibersek, Deputy Leader, ALP on 19 march, 2018
From: Plibersek, Tanya (MP) [mailto:[email protected]] Sent: Monday, March 19, 2018 3:50 PM To: Subject: RE: Labour Proposal to Axe Franking Credit Rebates to Individuals Paying No Tax
Dear
Thank you for your email about Labor’s policy on ending cash refunds for excess imputation credits. I appreciate the time you have taken to write to me.
I understand your concern that ending cash refunds for excess imputation credits affects people in the community. This change only affects people who are receiving cash tax refunds from the Government after paying no income tax.
This policy decision was a hard one and was not one that we made easily, but our budget can no longer afford to pay cash refunds for excess imputation credits.
Under the Turnbull Government, the budget deficit is eight times higher than forecast just four years ago and debt has continued to climb. The Turnbull Government is slashing funding on health, education and infrastructure while raising taxes for 7 million Australians. Labor’s decision will allow us to undertake budget repair to ensure – for example – that our public health system is able to provide care to all Australians who may need it.
In 2001, when the decision to introduce cash refunds was made by a Coalition government, Australia was in the middle of an economic boom. Today the budget is in deficit and if the current arrangements are allowed to continue, future governments will forego $8 billion in revenue annually. This revenue is equivalent to more than Commonwealth spending on Australia’s public schools this year and three times more than we spend on the Australian Federal Police to keep our country safe.
We just cannot afford it any more.
Australia is the only country in the world where cash refunds are provided for excess imputation credits. The original dividend imputation system introduced by Labor in 1987 did not allow for cash refunds. This is why Labor will move back to the dividend imputation system that existed prior to 2001, bringing us back in line with the few other nations that have dividend imputation systems.
2 This policy is not retrospective and, if we were elected, will apply from 1 July 2019. We have announced the policy well before the next election to give people the opportunity to adjust their investment portfolios and reduce the impact of the new arrangements if they wish to do so.
I hope this goes some way towards explaining why Labor felt it necessary to make this difficult but economically responsible decision. I have attached links to several articles which outline some of the key issues around the policy decision.
Once again, thank you for taking the time to email me and for sharing your views on this issue.
Yours sincerely
Tanya Plibersek
Tap the revenue leak: you can't argue with that – Sydney Morning Herald - Peter Martin
Keating backs ALP windback - Australian Financial Review– Phil Coorey
Ending unaffordable lurk is not a tax grab - Courier Mail Pg22 - Paul Syrvet
Shorten plan meets fairness criterion – Sydney Morning Herald - Caitlin Fitzsimmons
How some of the wealthiest pay ‘negative tax’ - The Age - Ben Oquist
Paul Keating backs Labor's plan to axe cash refunds for wealthy investors - The Guardian: Katherine Murphy
Dividend imputations reform is exactly what Labor should do - The Australian - Peter Van Onselen
Tax loophole: Labor to abolish ‘tidy little arrangement’ - News.com - Malcolm Farr
Email No 3 Reply to Tanya Plibersek email on 11 April 2018
From: Sent: Wednesday, 11 April 2018 2:35 PM To: 'Plibersek, Tanya (MP)'
Dear Ms Plibersek
Since I wrote to Bill Shorten as leader of the Labour Party with a cc to you and you replied to me, the Labour Party has changed elements of it proposal to axe franking credits to individuals paying no income tax. I understand the change includes a Pensioner Guarantee for full and part time pensioners who will still be eligible to receive franking credits even if they pay no income tax and a
3 provision (which I don’t understand) for individuals receiving a pension from their Self Managed Super Fund to also be eligible to receive franking credits even if they pay no income tax. This change still leaves self funded retirees such as my wife and me, who are not pensioners or part pensioners and who pay no income tax, ineligible to receive franking credits. We will lose part of our income stream which will impact significantly on our modest retirement income.
I believe your new proposal is inconsistent. Why should pensioners and part pensioners on low income who pay no income tax be intitled to receive franking credits plus their pension and maintain their income in retirement, while other retirees with slightly more income and/or assets (but who do not qualify for a part pension) are not entitled to receive franking credits and will see their income decrease. It is just not a consistent approach to ensure retirees can enjoy a modest and comfortable lifestyle. It favours pensioners and part pensioners at the expense of other low income retirees.
In your reply to me, you state affected individuals have until 1 July 2019 to ”adjust their investment portfolio”. Do you realise that, after turning age 65, we are unable to add more money to our Superannuation account, unless we pass the “Work Test”. My wife and I are aged over 65 years, have been retired for 5 and 4 years respectively and no longer wish to work and probably could no longer find work. So we can’t adjust our investment portfolio by selling franked shares and placing the money in our industry Superannuation account. We keep approximately one year’s projected expenditure in cash, but are advised not to leave larger amounts in cash as the value will erode significantly. The well credentialed financial advisor Noel Whittaker advises that the best investment for retirees, apart from assets in Superannuation and some as cash, is to invest a portion of assets in fully franked shares which offer growth and an income stream of dividends and franking credits and can be sold in small parcels if additional capital is required.
I repeat the closing sentences from my earlier email which you have not addressed. “The fact that 10% of individuals receive 90% of the total franking credit rebates paid to non-taxpaying individuals has been highlighted by you. So if the Labour party is aggrieved by some individuals receiving very high amounts of the rebate, put a cap or sliding scale on the franking credit rebates as happens with so many other government programs.” This would allow you to target the ”10% of individuals who receive 90% of the total franking credit rebates” mentioned above (and perhaps the eighth and ninth percentile) and who may be in a better position to ”adjust their investment portfolio”. But please don’t target the lowest second, third or fourth percentile, the retirees on low to modest income who don’t qualify for a pension and can least afford to lose part of their income stream. This proposed attack on the more vulnerable individuals of our society has elements of the tax grab and prosecution by the ATO on more vulnerable small businesses highlighted in the ABC Four Corners program of Monday 9 April.
I have discussed your proposal with other retirees in a similar situation to mine and all are horrified by the proposed change and the effect it will have on their life. One couple have said they may sell all shares paying a franked dividend and purchase only shares paying an unfranked dividend, but this strategy would exclude most blue chip shares. I think you are underestimating the degree of stress this is already causing the affected and vulnerable retirees, such as myself and my wife. Please reconsider, abandon or at least adjust the Labour Party proposal so there is minimal effect on retirees with low to modest income and who do not receive a pension or part pension.
Yours sincerely
End of emails
4 To date I have not received any reply to my second email to the ALP hierarchy about this matter.
In summary my major points are:
1. Self funded retirees such as my wife and I are experiencing considerable anxiety, concern and stress about the changes proposed by Labour, without any clear direction how we can maintain our current modest level of income and lifestyle. We are not eligible for the Centrelink pension or part pension, particularly now the asset rules for the pension have changed over the last year or two.
2. Retirees over 65 years old have limited opportunities to redirect capital held as shares into other income streams. Money can only be redirected into our superannuation fund if we pass the “Work Test”. We don’t want to work at this age, should not have to and probably couldn’t find suitable work. Surely it is better for the economy if younger people fill the available jobs.
3. If a LabourGovernment want to target the few individuals not paying tax and receiving most of the franking credits, put a cap or sliding scale on the franking credit rebates. I suggest franking credits of $10,000 per person for those not paying tax be allowed without restriction after which there is a sliding scale of entitlement for franking credits to, say, half entitlement by $15,000 and no additional entitlement beyond $20,000 because presumably they are then paying tax. However there are far more qualified people such as financial planner or tax accountants to work out the details as I realise that there are Low Income and Senior Tax Offsets which need to be considered in the calculations.
Yours sincerely
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