13 Mar Assault & Battery
Assault & Battery
Normally I don’t upset by things but today I am extremely hot under the collar about the announcement by the Labor Party of their intention to abolish the refund of excess franking credits. Whilst this is only a press release & not legislation (and therefore all details are not known) I would encourage everyone to get on the phone to their Local MP (especially if they are a Labor one) and any Seniors Group that you may be a member of or know of (COTA, Australian Seniors, etc.) & strongly voice your disapproval to the proposed changes. The announcement says that 200,000 Self Managed Super Funds (which may have up to 4 members) & a further 1,000,000 Low Income Earners (Read Age Pensioners) will be affected by this rule change. Corporate and retail funds are not expected to be affected as they pay tax on accumulation accounts, which is > refunds on pension accounts. This rule change if enacted creates different classes of investors and favours one group over an another, when they may be in exactly the same underlying position. So this pits Self Funded Retirees & Age Pensioners effectively against other superannuants, retirees & higher income earners. On top of this if you pay tax at higher rates (say like me for example) I will be able to get imputation credits offset against my tax, but a low income earner wont be able to use the excess credit – Is this not reverse psychology ?
Today Rice Warner have completed an analysis of the potential rule changes and these are some more of the unintended consequences: –
- It will no longer be attractive for company buy-backs. At present these are extremely favourable for retirees, including via SMSF’s, but the appeal will be lost if the franking credits cannot be used.
- The Future Fund will lose more than $1 billion a year in franking rebates.
- The cost of capital of Australian businesses will increase.
- The full report is linked below and they make a very pertinent point that I have made on the phone to a few people already. If Labor is worried about the rich end of town overly benefitting from refund of excess imputation credits, why not simply introduce a cap (say $10,000 or $20,000). Up to the limit you get a full refund, regardless of your position – this way a degree of fairness is introduced.
The refund of excess franking credits is actual cash that investors get paid, so the change in these rules means that you are actually having cash taken out of your pocket. If you invest in shares you are a part owner of the company. You take investment and economic risk in being an owner. As an owner of the company you have already paid tax at 30% on the profits before you receive them.
THIS IS PURELY A CASH GRAB
Dividend imputation was introduced to eliminate the double taxation of dividends & also to stop companies like Bond Corporation gearing themselves to the eyeballs to buy assets and reduce their profits (through large interest payments) to pay minimal tax. Companies pay tax at the rate of 30% on their profits and then pay you a dividend out of their after tax profits that carries a 30% franking or imputation credit. You then pay tax on the dividend and apply the franking credit against your net tax. If you do not pay any tax then you are entitled to a refund of the credit. Example as follows assuming a “fully franked” $100 dividend: –
Tax Payer Tax Rate Nil Tax Payer 40% Tax Payer
Dividend $100 $100
Franking Credit $ 30 $ 30
Taxable Income $130 $130
Tax On Taxable Income Nil $ 52
Less Franking Credit Refund $ 30 $ 30
Net Tax Paid (Refund) ($30) $ 22
IF YOU ABOLISH EXCESS FRANKING CREDITS NIL TAX RATE INVESTORS ARE EFFECTIVELY PAYING TAX AT 30% ON THE DIVIDEND RECEIVED (WHAT THE COMPANY PAID)
The press release is that this is targeted at the wealthy, but that is a total load of bollocks. Nil Tax payers (SMSF Allocated Pension Funds, People who earn < $18,200) will lose these franking credits. This means even people on Age Pensions who hold a small amount of shares in their own names and receive franked dividends will lose these credits (Cash In Pocket). Media reports are saying that 97% of people affected by these changes earn < $87,000 pa and 50% < $18,200. What even incenses me more is that the goal posts are being changed again for all retirees and those people heading into retirement.
It was only last year that Labor’s Shadow Assistant Treasurer Andrew Leigh wrote an opinion piece in the Sydney Morning Herald & then had to make an embarrassing public apology for being completely wrong, in trying to claim that “five investors – HSBC, JPMorgan, National Nominees, Citicorp and BNP Paribas” are “the biggest owners” of Australia’s largest listed companies. The claim was that these shadowy “institutional investors” are “the Lexcorps and Cyberdynes of the Australian economy” and “what’s surprising about this is that many Australians probably haven’t heard of some of them.”
Read more: https://www.afr.com/brand/rear-window/labors-andrew-leigh-humiliates-himself-on-share-registry-ignorance-20170314-guy6k6#ixzz59bP5m4Po
This is the type of thinking that permeates the world now, where everything is split into whether it is fair or unfair and if someone has something you don’t it is a rort or a loophole.
Australia is a country that needs capital, especially foreign capital. During the GFC companies listed on the ASX were shut out of global markets (you may not know that but the Government “lent” the Major Banks their AAA rating so they could raise funds from offshore) & could not borrow monies locally. What they did was go to institutional investors (Super Funds & the like) to raise capital. We need a healthy & liquid sharemarket, or otherwise our economy and yes you guessed it everybody’s hip pocket will be affected.
Not only that but there will likely be a litany of unintended consequences of such a move of abolishing excess franking credits: –
” Investors could dump companies that pay fully franked dividends
” Low Income people could dump shares completely and just put the $$$ back into the bank
” Some investors could chase extra income and invest in other areas that could open themselves up to more risk
” Retirees rely on these credits and do not have the ability to earn extra income
” Institutional investors could review their asset allocations causing winners and losers
” Investors may withdraw funds from Australia & invest overseas looking to generate higher returns
” Investors could plow more $$ into the property market which could increase property prices again
These are only some of the things that come to mind, but I am sure there are a whole heap of others.