Who will be the losers under Labor’s proposed franking credit change

Who will be the losers under Labor’s proposed franking credit change

March 16, 2018 - 10:59 am

The best way to show that Chris Bowen and Bill Shorten have miscalculated the impact of their franking credits thrust is to go deeper into the world of superannuation.

As I pointed out yesterday there were a significant number of people who in the last set of superannuation statistics received large franking credit refunds in their self-managed superannuation funds. These are the people the ALP are targeting.

But to receive those credits they needed to have substantial sums invested tax free in pension mode superannuation — say over $5 million.

But Scott Morrison limited the amount of money you could have in superannuation tax free pension mode to $1.6 million. In other words he confined the vast majority of the franking tax credit refunds to the battlers who were struggling to fund retirement in an environment of low interest rates.

This is not the ALP story, so let’s show the impact of the ALP measures on three groups.

First, a battler with up to $1.6 million in investable funds (usually it is much less); a person who has a substantial sum over and above $1.6 million that is invested, say, 40 per cent in shares that have fully franked dividends and, finally, a person who invested all their money over the $1.6 million tax free zone in franking credit shares.

The Battlers: These people have been struggling to fund their pensions given low interest rates and normally have well under $1.6 million in superannuation. Their money is in pension mode and therefore the income is tax free.

For every $100 they receive in franked dividends they gain a franking credit of just over $42 which takes their taxable income to $142, which is currently tax free. But under the ALP proposal they receive no return of their franking credit so they are just over $42 in every $100 of franked dividends worse off. Their privately-funded pensions will be reduced. That’s a huge blow to the hundreds of thousands of Australians in this situation given the pitiful interest rates being received on bank deposits. Some may get partial compensation from the government pension but it will not be enough.

The Prudent Big Investor: The prudent big investor would not have more than 40 per cent of their money in franked shares and hybrids. So we look at the impact of the Shorten-Bowen measures on their money over $1.6 million in pension mode.

On $100 of income in the fund they will receive say $17 in franking credits but those franking credits are matched by tax payable so they continue to receive the benefit. And that also applies to those with funds not in pension mode. Accordingly, to the vast majority of Australians who have saved more than $1.6 million, there is minimal impact.

Big investor with all money in franked credit shares: Very few big investors would do this. It’s not a prudent strategy They will have mixed their portfolio with international shares and property investments.

But here are the sums:

For each $100 in income they receive a franking credit of just over $42 so their taxable income is just over $142. But these people pay 15 per cent tax on amounts over $1.6 million and that absorbs about half of the franking credit. They lose about half the value of their franking credit. And they will also have taxable capital gains which means they receive even more of the franking credit. People in that position will adjust their finances so that the impact is much less than losing half the franking credit. They simply will not have all their money in franked shares and nor should they. There will be no big money raised in this area.

Sorry Chris, sorry Bill.

Unfortunately the money comes from the battlers. If the large sums that Chris Bowen believes can be raised have a substantial content from groups two and three, then his sums will be wrong.

If he has done his sums based on almost all the money coming from the battlers then his sums will be right, but the impact is outrageous in this time of low interest rates and totally different to the ALP rhetoric.

Bill Shorten and Chris Bowen are going to be minced. They may be forced to retreat.


Robert Gottliebsen


Business columnist


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