14th May 2019
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Comment: Franking credits and who is really affected
Author: Kaye Fallick
kaye fallick

Ever given a child a lolly and tried to take it back?

Outrage, right?

And the same goes for retirees and cash payments for franking credits. We’ve seen a lot of outrage and disbelief at Labor’s proposed reversal of this cash payment.

So what is the truth about changes to franking credits and who will bear the brunt?

First up, not all retirees are benefitting from cash payments for excess franking credits. In fact, the Parliamentary Budget Office confirms that 92 per cent of Australians will be unaffected by Labor’s proposed changes to franking credits. This leaves eight per cent who are likely to be affected, and with all pensioners exempt (along with not-for-profit institutions and self-managed super funds with a pension recipient), this leaves a very tiny cohort whose income will be curtailed. Which is surprising given the hue and cry we have heard about this proposed change.

Those most likely to be affected are retirees who do not receive a full- or part-Age Pension (about 30 per cent of Australia’s 4.5 million retirees), those who describe themselves as ‘self-funded retirees’. But are they really ‘self-funded’? Extremely generous tax concessions apply to their superannuation and mean they pay no tax on the earnings or income derived from their super once it is accessed – for as long as they live.

The real question is, who else in Australia gets a free kick like this?

In terms of GDP, such superannuation concessions cost Australians $55 billion per year, which is higher than the current cost of the Age Pension at $48 billion per year.

So if tax concessions, paid for by revenue foregone by the Australian Tax Office (ATO), allow retirees to have a higher income, such retirees cannot accurately be described as ‘self-funded’. For the sake of grammatical accuracy, such retirees are actually non-pensioners as, like age pensioners, they too rely on government concessions and handouts in retirement – just a different type.

Does this mean Labor’s policy to remove franking credits from non-pensioners should be supported?

Yes, it should – for two reasons of equal importance: fiscal responsibility and intergenerational equity.

Australian voters regularly ask who they should trust to best manage the economy. A fair and important question, suggesting fiscal rectitude is of prime importance. The cost of the franking credit cash refund introduced by the Howard Government in 2001 was originally manageable, costing the nation $550 million per year.

Fast forward to 2014 when, according to Treasury, it cost us $6 billion per year and is projected to increase to $8 billion per year over the next few years.

But wait, it gets worse. One estimate (reported by Duncan Hughes in the Australian Financial Review on 12 March) states that there was a “record $16 billion of franking credits from the latest earnings season, a jump of about 45 per cent compared with the previous period”. Sixteen. Billion. Dollars.

Not only do these ballooning costs make retiree credits totally unaffordable, they are also inequitable when they are paid to a handful of retirees who comprise some of the wealthiest households in the nation, while the vast bulk of retirees miss out on this largesse.

Australia has long prided itself on fostering one of the most egalitarian societies in the world. Yet this claim is fast disappearing as the nation’s wealth divide increases, with 22.4 per cent of wealth owned by just one per cent of households.

Segments of the current generation of retirees are disadvantaged, as they have not had the support of guaranteed superannuation for a sufficient time, or at all (in particular women who stayed home to raise children), and so their retirement savings are slim indeed. And then there are the those whose only income is the full-Age Pension, in particular, the 15 per cent who rent and who are barely eking out an existence.

But it is not just an unequal playing field in retirement, it is unequal in a generational sense with first home buyers up against investors with multiple properties. Such young people are often working in casual, part-time or ‘gig’ economy jobs with little security and no real hope of securing an asset in the form of their own home.

Surely the projected $16 billion used for ‘non-pensioner’ retiree cash rebates could be better spent on home ownership incentives for this generation of taxpayers. At least they are contributing tax, while the recipients of cash rebates most often do not. Or it could go towards social housing for disadvantaged older Australians who are joining the ranks of homeless people. Or even be used to increase the Newstart Allowance – a pittance payment on which a huge number of older and younger people currently struggle to survive.

There is the argument that a generation of retirees (since 2001) has based its income planning on the generous franking concessions. While these concessions are clearly no longer affordable, it is right and reasonable to note that a degree of grandfathering and a reasonable transition to the new rules would make the proposed changes fairer, giving recipients time to rearrange their retirement income streams.

I recently attended the parliamentary inquiry into the implications of removing refundable franking credits at Malvern Town Hall.

It was standing room only.

Of the 60 or so speakers on the day, only four endorsed the proposed changes to franking credits. Of the rest of the submissions that opposed the change, almost every person noted that he or she had grown up in a poor household, had created their own wealth and were living on a range of incomes from $40,000 to $120,000. All believed they would be significantly disadvantaged and would struggle financially if the cash payments for excess credits were withdrawn.

One gentleman plaintively stated that he would need to forgo his jazz appreciation classes without this cash refund.

Let’s hope he never needs to survive on a full-Age Pension of $25,000, forcing him to choose between heating or eating when winter arrives.

As I said, give a kid a lolly …

Kaye Fallick is the publisher of Australia’s longest-running retirement website, YourLifeChoices, and a vocal advocate for all retirees.

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