Franking credit refunds PBO estimates in doubt, page-38

Snippets from PBO response to Leyonhjelm PBO reference PR18/00581.Nov 19, 2018
clarification requested by The Hon Matt Thistlethwaite MP,Member for Kingsford Smith

6. Did the PBO provide the costing based on the most recent budget policy baseline? For example,
did the costing account for the Government’s transfer balance cap policy?

The PBO always takes current government policy settings into account when preparing its policy
costings.
The response to Senator Leyonhjelm was provided on 4 May 2018, so the baseline set of
policies and economic parameters used in this costing were those that had been legislated or committed to as at the 2017‐18 Mid‐Year Economic and Fiscal Outlook.

The policies that formed the baseline from which this policy proposal was costed included the superannuation changes announced in the 2016‐17 Budget and the scheduled company tax cuts (some of which are now not proceeding).
The superannuation changes announced in the 2016‐17 Budget included the introduction of the transfer balance cap along with a number of other changes.

8. Some have criticised the PBO for its use of the 2014‐15 Australian Taxation Office (ATO) dataset
because it implies the PBO did not account for the Government’s more recent (2016‐17 Budget
measure) transfer balance cap. Can you please respond to that criticism?

As noted in our response to Question 6, the PBO always takes current and future government policy commitments into account when preparing its policy costings. A key input used in preparing costings is the most recent available data, which in this case was the 2014‐15 administrative taxation data for superannuation funds and individuals.

These data included detailed member account level data for SMSFs. The transfer balance cap was not in place in 2014‐15, so these baseline data had to be adjusted to account for the impact of the changes in policy announced in the 2016‐17 Budget before they could be used to cost the new policy proposal.

It is a common costing practice for all agencies preparing costings to use, as their baseline data, the
most recent year of available data adjusted for policy changes and changes in economic parameters
that have occurred since the year of the data.

10. Can you outline the extent of the behavioural response you have factored into the costing? To
what extent would the costing have generated more revenue if these behavioural changes had not
been assumed?

The PBO considered a range of likely behavioural responses to the policy proposal by individuals, companies, Australian Prudential Regulation Authority (APRA) regulated superannuation funds, and SMSFs.

• For individuals, potential behavioural responses could include shifting from shares to alternative investment arrangements (including to investments within superannuation), and couples shifting the ownership of shares from the lower income earner to the higher income earner such that the higher income earner can utilise the franking credits as a non‐refundable tax offset.

• For superannuation funds, potential behavioural responses could include rolling assets from a fund
with negative net tax to a fund with positive net tax, changing funds’ asset portfolio allocations, or
changing the membership structure of the fund, in order to maximise the utilisation of franking
credits.

• For companies, a potential behavioural response could include changing the amount of dividends distributed (and profits withheld) or the level of dividend franking due to the decrease in the value of franking credits for some shareholders.

In the absence of the assumed behavioural responses, the PBO estimates that the financial implications of the proposal would be about 15 per cent higher over the period to 2027‐28.

The PBO considers that this incorporates a significant behavioural response to the proposal, particularly for trustees of SMSFs. The assumed behavioural response for SMSFs in 2019‐20 is equivalent to these funds, in aggregate, moving around a quarter of the value of their listed Australian shares into APRA‐regulated funds that are in a net tax‐paying position.