Eight reasons Labor’s franking credits change isn’t fair
Opposition Leader Bill Shorten and shadow treasurer Chris Bowen. Picture: Ray Strange.
We now have a genuine debate over the ALP’s proposed retirement and pensioner tax, levied via cash franking credits.
A number of young journalists have declared the tax is “fair”.
They are entitled to their point of view, but I believe it blatantly unfair and I will set out eight reasons to support this view.
First let me declare my personal interest. I am aged well into my 70s and I still write most days, which helps the balance sheet.
While I don’t consider myself rich, I have a level of wealth that means that, with normal diversified investments, I will not be affected by this tax. And all the people I know in a similar or higher wealth bracket are just laughing at the ALP’s proposed tax. It does not affect them.
But I know a lot of people who are not as well off and they will be crippled. It’s not fair. Today I’ll try to show the silent ALP politicians, who also know this tax is unfair, how it can be structured in a fair way.
1. It’s simply not fair
So my first unfairness ranking is that this is a tax that aims at the battlers. People who are well-off will continue to get their franking credits in full. In 2015 the situation was different, and the shadow treasurer Chris Bowen keeps quoting these outmoded figures. I know a large number of older people, including those who are approaching retirement, who will be devastated by this tax.
2. Discrimination in favour of the rich is not fair
Many right wingers will disagree with me, but I think its reasonable that higher income people should pay higher tax rates than lower income people, but the ALP franking credits plan has been structured so that the richer you are, the less you are affected. If we theoretically compare people, whose assets consist entirely of shares paying fully franked dividends, the tax rate falls as the dividend income rises. Obviously, I am grateful that most pensioners (but not all) have been excluded, but this is a tax structure that creates a precedent that if it was applied widely would cause great division in the community. If you are unhappy about franking credits, then you should argue that everyone should be taxed, not just the battlers.
3. It’s not fair to tax people on the basis of who manages their money
Since federation we have taxed people on the basis of their income, assets, business structures and so on. But all people in the same asset or income class are taxed the same way. But the ALP plans is that if you save via an industry superannuation fund or a large retail fund, then you can receive your cash franking credits in full. Save in your own name, via a self-managed fund or some retail funds and you are taxed. We have never before taxed people on the basis of who manages their money. In the footnote below I will explain the highly dubious money manipulation technique used to achieve this indefensible outcome.
4. It’s not fair when politicians use weasel words to obscure mistakes
Politicians use “weasel words” when they are misleading you. To quote Chris Bowen: “All of the 2.5 million retired pensioners, full and part, are exempted from Labor’s policy.” Various other Labor politicians have made similar statements. When the policy was announced it was very clear that those who were pensioners after March 28, 2018, and who had their money in a self-managed fund, would not be exempted from the tax and their cash franking credit entitlements would be scrapped. Many ALP politicians have actually declared that all pensioners will be OK. We need a clear written statement reversing the original policy and so that all pensioners, retired, working or in self-managed funds receive their cash franking credits entitlement.
5. It’s not fair when politicians don’t tell the full truth
Chris Bowen says: “This is not a tax.” Wrong, wrong. Currently, a vast number of Australians receive a dividend and franking cash payment representing the tax companies have paid on their behalf. Those who happen to in a legal income tax-free status are now being levied the amount of that cash payment. When you abolish a tax refund, which is what the franking credit is, this means the individual effectively pays the abolished amount in tax. In every sense of the word this is a tax which increases government revenue.
6. It’s not fair to retrospectively tax small business
Small businesses might not have been the target of Labor’s tax, but hundreds of thousands of them have structured their finances so that their company has stored franking credits. When they sell or close the business, they have no other income and they take advantage of the tax they paid in past years to boost their income via cash franking credits. They will be decimated. This is retrospective legislation which hurts retiring small businesses and reduces the value of all small businesses.
7. It’s not fair to retrospectively tax all retirees
I can hear a million battling retirees shouting: What about us? We carefully planned our retirement on the basis of cash franking credits. We are also being retrospectively taxed. Absolutely right.
8. Reversing policies agreed by both parties after independent reviews is not fair
It’s important to understand how Australia came to have its franking credits policy. A lot of false statements are being made about a “Keating policy”. Franking credits was a policy agreed by both parties and the history is important. In 1979, the Fraser government commissioned an independent review in to the financial system. The Campbell Review reported its findings in a comprehensive report to government in 1981. In Chapter 14, it considered the then double-taxation of company profits: firstly, in the hands of the company and secondly in the hands of the shareholder. The committee set a critical benchmark when it said, in paragraph 13.8, that with some exceptions that are not presently relevant, “the taxation system should meet the tests of neutrality equity and simplicity”.
The Campbell Review set out in beautiful simplicity the company tax system we have now enjoyed for some 30 years.
In dealing with the system of imputation it recommended as part of a full imputation system that there would be a refund of excess credits to lower income earners.
To their great credit it was the Hawke-Keating government that in 1987, gave effect to the “interim’ recommendation of the Campbell review.
The interim arrangements ended and, as was recommended, following the Ralph Review in 1999. The legislation giving effect to refunds of excess franking credits was introduced under the Howard government and was passed, not surprisingly, with bipartisan support.
Our present system was designed by an independent body and was implemented with bipartisan support.
The ALP is in a bind. It is proposing a grossly unfair tax and even making the absurd statement that the tax is not a tax. It could allow a quota of cash franked credits, of say $10,000 to $15,000, but then they will raise very little money for the reasons set out above. If they think franking credits are too generous then reduce the credit to all from 100 per cent to say 95 or 90 per cent. Then everyone pays the tax not just the battlers. I would still oppose the tax, but not on the grounds of fairness because it covers all Australians.
Footnote: How are industry and big retail funds able to give retirees full franking credits?
These funds have members who are salary earners and pay tax. Those salary earners’ tax payments can then be credited to the retirees so they can receive their corporate tax cash refunds. That’s an insult to the intelligence of ordinary Australians.
