The Superannuation Tax Grab

An apparent new tax grab has the potential to hit everyone – all 12 million of us.

The plan is to deny dividend tax refunds to retirees, non-tax payers, and purport to target directly self-managed funds.

It is likely to make 12 million Australians, those with superannuation funds worse off.

All superannuation members will lose out not just those with a Self-Managed Superannuation Fund.

The plan means anyone in retirement and living on their superannuation savings will now have every dollar of their income from dividends taxed at a rate of at least 30%.

In reality, it will hit millions of members of the large industry and retail funds as well. The members of the large funds won’t see the effect so clearly because their savings are pooled, they will just get a lower earnings rate credited to their savings. Large funds also invest in shares for their members and provide pensions to their members.

Abolishing cash refunds for individuals and superannuation funds will raise about A$5 billion a year in extra revenue with about 33% collected from individuals, 60% from self-managed superannuation funds and the remaining 7% will be paid by Australian Prudential Regulation Authority regulated superannuation funds, the large funds

To illustrate, consider the following three cases.

  • Person A does a little bit of part-time work that earns $17,500 a year, just under the income tax threshold. They don’t pay tax.
  • Person B is semi-retired but runs a small sole trader business that brings in a net of $17,500 a year. They also don’t have a tax obligation.
  • Person C is retired and owns shares in a company that earns $17,500 of profit on C’s shares. Being a company with other shareholders, it pays 30% company tax and most of the rest is distributed to shareholders as dividends. Person C receives a dividend of $12,250 (that is, 70% of $17,500). They have effectively paid $5,250 in tax on their income because of the veil that the company structure has created.

Under the current imputation system, Person C receives a franking credit for that amount and a payment of $5,250 comes from the ATO. This recognises the fact that the full $17,500 earned by the company should belong to Person C, just the same as Person B’s business income or Person A’s part-time salary. Under the proposal, Person C is likely to use their $5250 franking credit.

The franking credit regime was set up for many reasons. It aimed to bias Australians towards investing in Australia. In practice this appears to have led to Australian companies being funded more through equity and less through debt, improving financial stability. In practice, franking credits also encourage Australian companies to pay dividends rather than inefficiently hoard cash or invest in low-return projects.

 

It is accepted economic wisdom that savings should be taxed at a concessional rate otherwise people won’t have an incentive to save and when they retire they become a heavier burden on the next generation of taxpayers.

Continual meddling with the successful concept of imputation – that when company dividends are paid they are taxed at the individual’s tax rate with full credit for the tax already paid by the company does nothing to instil confidence in the need for retirement saving.

The likely impact on share values will detract from their value especially if a retiree who has investments in mainly large corporations, like the big banks, miners and Telcos, that issue franked dividends loses the imputation credits.

 

If the goal of what has been presented endeavours to make the tax system fairer, by clawing back what an overly-generous provision, the reality is that it would make the tax system much less fair.  The imputation system aims to adjust how much tax has been collected on behalf of the shareholder, rather like PAYG,  and correct it back to the amount of tax that should have paid in the first place. If that was zero, then a fair and just system would pay a tax refund. We have that system now.

 

That there is already conjecture on tinkering with a maximum amount of refundable franking credits or a compensation scheme points to continuing uncertainty on establishing the best taxation policy for Australia that is fair yet repairs the current debt created out of the necessity of surviving the Global Financial Crises.

 

The message from both sides of politics and the minor parties is clear: you savings are fair game when governments are looking for money to cover the big budget deficits that they have racked up. Consider other measures that have reduced contributions, or have put a ceiling on tax-free retirement income, or applied an earnings tax on capital gains that were all previously exempt.

 

Nobody can be sure that the savings they are compelled to invest in superannuation under today’s rules will still be there under changed rules in the future