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How to avoid Shorten's plan to abolish the refund of excess franking credits

Discussion in 'General Chat' started by bigdog, Apr 10, 2018.

  1. bigdog

    bigdog Retired

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    This article is from the April 8 issue of The Age Digital Edition. To subscribe, visit https://theage.digitaleditions.com.au/.


    Noel Whittaker

    LABOR'S CHANGES A TAX ON WIDOWS

    Labor’s latest attack on franked dividends is not a tax on the wealthy, it is a tax on widows.

    Let me show you step-by-step . The imputation system, which avoids dividend income being taxed twice, will stay in place. What Labor proposes is to abolish the refund of excess franking credits. The only way you can have an excess franking credit is to have a low income. Therefore, the only possible targets are low-income earners, and superannuation funds, where the tax rate varies between zero and 15 per cent.

    But there will be no tax to be collected from large retail funds and industry funds, as they can spread the imputation credits over all their members: nothing for Labor here.

    And they have promised to exempt all age pensioners: nothing for Labor there either.

    So let’s think about who is left, on a case-by-case basis.

    Self-managed super funds in pension mode with two members holding a total balance of less than $3.2 million

    They can be seen as the prime target, because clearly all their excess franking credits will be lost under Labor’s proposal. But that is simply solved.

    One option is to close the SMSF and roll the balance to a large retail or industry fund as mentioned above. The other option is to cash in their entire holding of Australian shares, which can be done tax-free , and roll over the cash now freed up to a second superannuation account with one of the big funds, choosing Australian shares as their preferred asset class.

    With this strategy, there is still nothing for Labor: the SMSF trustees can make any investments they choose – avoiding Australian shares – in their self-managed fund, and the pooled fund will invest in Australian shares for them, while optimising their mix for the current tax situation.

    Self-managed superannuation funds with large balances

    This could appear to be an easy target, but the Liberals got there first . Think about a portfolio of $10 million, which has a fairly standard asset allocation of cash at 20 per cent, Australian shares at 35 per cent, international shares at 25 per cent and property at 20 per cent. The annual income would be $390,000, including franked dividends of $140,000, on which franking credits are $48,000. When you gross up the income for the franking credits, the taxable income of the fund becomes $438,000.

    Before the Liberals changed the system in July, the franking credits of $48,000 would have been refunded. But because the fund is 70 per cent in accumulation now, the tax payable by the fund becomes $46,000. Imputation credits pay all this, leaving just $2000 for Labor. I’m sorry Bill, but Malcolm beat you to it.

    Older, wealthy, self-funded retirees

    Their situation should remain unchanged. Let’s say their main asset is a portfolio of $4 million of Australian shares in joint names paying franked dividends of $90,000 a year to each person plus franking credits of $38,571.

    The tax on that will be about $38,000, including the Medicare levy, which means they may lose possibly $600 in franking credits, small bikkies in the scheme of things.

    So who is left over to pay the tax? We have raised almost no extra tax so far.

    Widows and widowers

    Let’s return to our good friends the Browns, who you met in last week’s column. They owned their own home, had $75,000 in bank deposits, and also held a share portfolio worth $710,000 returning dividends of $32,000 plus franking credits of $13,700.

    Their pension was $19 a fortnight combined, so total income – including franking credits and interest – was $47,700 a year.

    Unfortunately, Mr Brown died suddenly last week, leaving all his assets to his wife. Her situation will change dramatically.

    She is now a single pensioner, and the assets she has inherited take her over the Centrelink cutoff point. She will lose her pension, as well as the concession card that goes with it.

    The good news is that she will keep the franked dividends of $32,000. The bad news is that, under Labor’s proposal, she will lose the franking credits of $13,700. Labor’s proposed measures have finally raised some money.

    Hopefully anybody potentially in this situation will have taken good estate planning advice to ensure a more effective distribution of assets when one party dies, so the survivor can retain a part pension and all the franking credits.

    So how could Labor have made such a massive mistake? First, it was done in haste. Remember it was announced just a few days before the Batman byelection.

    Second, it is obvious that the costings were based on the situation before the June 30 changes, when the tax-free component of super was limited to $1.6 million.

    Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au
     
  2. Skate

    Skate

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    Hi bigdog

    Thanks for posting an informative article from Noel Whittaker

    Bill Shorten frames his case around the "Franking Imputation Tax credits" playing one section of the community against another meaning he is talking to the 25 -35 year age group -- vilifying the 55 to 75 year age group)

    Noels article is highlighting another reason why this policy idea of his is unfair.
    Retirement Investment returns are also treated unfairly.

    SUMMARY if others have missed it.

    Consider three people, all of whom have SMSFs in pension phase, and who — according to the current tax rules — pay 0% tax:

    1. Banking Betty,
    2. Rental Richard and
    3. Dividend Davina.

    (a) Banking Betty deposits $100,000, and earns $2,000 each year in interest. Betty doesn’t pay any tax.

    (b) Rental Richard has a $100,000 property that pays him $2,000 each year in rent. Richard doesn’t pay any tax.

    (c) Dividend Davina buys $100,000 worth of shares that earned a profit of $2,000. The company paid tax of $600, so Davina gets $1,400. Davina doesn’t pay any tax.

    See the difference here?

    Because Davina’s investment is in the form of shares in a company, she gets less than the other two. Even though she’s not supposed to pay any tax, the company paid tax, so she gets less.

    Under current rules, she’d get the $600 back, delivering on the current government policy of a 0% tax rate, and equalising the return for each of those investors. (WHICH IS ONLY FAIR)

    So BILL -- why should Davina be penalised for her choice of Investment vehicle?

    CONCLUSION: Bill Shorten, in effect, is penalising people for owning shares.
     
    Value Hunter, Bill M, gyro and 2 others like this.
  3. WRiley

    WRiley

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    What are Bill's reasons for not giving the above refund ? Where will the 'unrefunded monies' be channeled to then ? After all, this is the 'second tax amount' against the same liability,...
     
  4. willy1111

    willy1111

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    He doesn't have enough coming in (revenue) to fund the handouts the government provide to the population.

    Therefore he thinks it is fair and reasonable to take more from those that have to give to those that don't have.

    And if you own shares and receive dividend income you are considered to be in 'the have' camp and are in Bills firing line.
     
  5. Tisme

    Tisme Apathetic at Best

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    How to avoid Shorten's plan = don't vote for his party at the next election.

    Similarly how to avoid rudderless Malcolm = don't vote for the bickering Libs.

    If Paul Keating stands, love him or hate him, vote for him.
     
    willy1111 likes this.
  6. PZ99

    PZ99 ( ͡° ͜ʖ ͡°)

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    Only one problem. Shorten's plan is the same as Keating's plan :)
     
  7. Tisme

    Tisme Apathetic at Best

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    Yeah but Keating can explain why things are done so they are digestible to the market and the man on the street...something Mal and Bill are incapable of:

    e.g.

    “The imputation system I introduced did not incorporate ‘cashbacks’ for those taxpayers whose average income tax rate was less than the 30 per cent corporate rate,” Mr Keating told The Australian.

    Mr Keating, who served as Treasurer (1983-91) and Prime Minister (1991-96), said the current system introduced by John Howard and Peter Costello needed reform because it saddled the country with huge imposts on the budget that are no longer affordable outside boom times.

    “This provision, introduced by the Howard government in its search for the grey vote, replete with budget surpluses a la the China boom, was simply unnecessary largesse, as was the concomitant removal of tax on large superannuation accumulations for taxpayers over 65 years of age,” Mr Keating said.

    “These two policies were funded by a spike in national income — a spike which has since disappeared, but left us with these large permanent structural budget costs.”

    Labor’s policy will abolish cash refunds for excess imputation credits used by shareholders and self-funded retirees who pay little or no tax. The measure will boost the budget bottom line by almost $60 billion over the next ten years.

    “The Labor Party is dealing with these structural anomalies in the search for fiscal stabilisation, something the government is badly failing to do,” Mr Keating said.

    Mr Keating sees the policy as essentially a return to the dividend imputation system that he introduced in the years following the Hawke government’s 1985 tax summit. The purpose of that policy, as Mr Shorten said yesterday, was to eliminate double taxation on company profits.

    “The imputation system essentially turned the company tax system into a withholding tax — a tax withheld by the Commonwealth to be returned shareholders stapled to their dividend,” Mr Keating said.

    “In this way, corporate income was only taxed once and not twice as it was under Coalition governments in all the post-war years.”
     
  8. WRiley

    WRiley

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    Thank you to all who replied here,... looks like there is not going to be a way for us to avoid this refund-removal next year, huh ?

    Keating and Shorten are going to do this, while Turnbull's poll results show he may not win in the coming elections,....
     
  9. Junior

    Junior

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    By rolling your super into a retail fund, you could potentially still be eligible for franking credit refunds. However I'd suspect labor will try to find a way to close this loophole. If they don't, there could be a mass closure of SMSFs.

    Shorten still has to win an election, AND the proposal has to go through in it's current form.
     
  10. bellenuit

    bellenuit

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    Wouldn't an Industry Fund be safer, as I believed they are exempt (something to do with the Unions). There are many pretty good Industry Funds, like REST for example.
     
  11. willy1111

    willy1111

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    Depends on how you rate your ability to outperform the market, ala @craft compounding SMSF returns over 30% for over ten years.

    Also a large portion of SMSF set up to buy property so they would be unlikely to be affected or consider closing down due to proposals.

    Those just doing the LIC or index thing may very well be better off with a retail/industry fund.
     
  12. WRiley

    WRiley

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    But looking at the current state of events, with Shorten and Keating thinking alike to remove our refunds, and Turnbull not doing too well in the polls, who else can we rely on to takeover the seat and not remove our refunds ?
     
  13. Tisme

    Tisme Apathetic at Best

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    The govt isn't making enough noise about this for votes. I suspect it will end up being a modified version that gets bi partisan support.
     
  14. PZ99

    PZ99 ( ͡° ͜ʖ ͡°)

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    I'd say the chances of bi partisan support are zero.

    More likely it'll get blocked by a hostile senate if it goes that far.
     
  15. Tisme

    Tisme Apathetic at Best

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    Be interesting. I think the announcement was timed to give Malcolm a fightback tool (Mal and Bill bail each other during party crisis), but it barely surfaced as a headshake
     
  16. PZ99

    PZ99 ( ͡° ͜ʖ ͡°)

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    Regardless of the motive it was clearly poor timing because it could have contributed to Labor losing the SA election afterwards + Bill Shorten has already back flipped on parts of the policy + he avoids addressing how pensioners would be protected.

    No I'd say it was a Bill Shorten brainfart akin to agreeing with everything that Gillard said without knowing what she said. Labor have nothing to gain from handing Turnbull a lifeline.

    The reason the Govt couldn't capitalise on it was because they are still being undermined by their conservative backbench.
     
  17. Tisme

    Tisme Apathetic at Best

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    I wasn't inferring a govt lifeline.
     
  18. PZ99

    PZ99 ( ͡° ͜ʖ ͡°)

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    I agree. Which is why I said Labor have nothing to gain from handing Turnbull a lifeline.
     
  19. Junior

    Junior

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    Both retail and industry funds wouldn't be impacted by the proposal, as it currently stands. Retail funds give you access to 100s of managed funds, shares, LICs, Index funds etc. so if one of your aims is to obtain a high level of franking credits, then retail would be the go as you can customise a portfolio with this objective in mind. If you want a simple, low cost option then Industry funds fit this profile.
     
  20. Tisme

    Tisme Apathetic at Best

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