No Images? Click here March 2018 Labor Policy on Dividend Imputation forfeiture will hit an unexpected target!From the perspective of working inside an accounting and financial advisory practice, it is evident that the policy affects two groups: 1. Private Investors The first group are those, mainly older people, who took up the offers of shares in Commonwealth Bank, Telstra and Qantas when sold off by the government when all citizens were able to purchase shares; plus those Woolworths customers who subscribed to its IPO following the Adsteam disaster, as well as former policyholders of AMP who received shares when it de-mutualised. Some have purchased other shares. With the expiry of time most of those shareholders are now in retirement. Those on modest retirement incomes will see their imputation credits confiscated and effectively forfeit 30% of the value of their franked dividends unless they change their assets but many will be caught out. For Labor to pretend that their confiscation of imputation credits is not a tax increase is blatantly dishonest. The proposition that cash refunds are somehow different from tax rebates/deductions which lead to lower tax being paid is confused in the minds of the commentariat. From the budget bottom line there was absolutely no difference in cash paid out to less tax being paid. It’s not just government spending that affects a budget but the various tax measures that lead to lower tax revenue. If Labor is serious about the dividend imputation debate it would talk about the overall cost of imputation credits being used by taxpayers not selecting out particular taxpayers. It is noteworthy that Labor’s election policy in 1998 was in favour of the refund of surplus imputation credits and that subsequently when introduced by the Howard/Costello Government, Labor warmly supported it. A multitude of retirees and investors have factored it into their income calculations and spending. 2. Superannuation Funds Depending as to whether a Self Managed Superannuation Fund (SMSF) is in pension paying phase, accumulation phase or is part pension paying and part accumulation its tax rate varies from zero to 15%. Certainly those superannuation funds advised by Synstrat Management Pty Ltd will be advised on the appropriate mixture of investments so as to suffer no forfeiture of imputation credits. Australia wide, most SMSFs will restructure increasing their investments in international companies like CSL which pay unfranked dividends, listed property trusts which pay unfranked distributions, infrastructure trusts which pay unfranked distributions and well regarded international exchange traded funds such as the Standard and Poors 500 ETF which invests in the 500 leading stocks listed on the New York Stock Exchange which include a host of international businesses. The anticipated revenue gain to government from SMSFs will vanish. Those relatively few, but very large superannuation funds, with significant assets over and above the $1.6 million pension limit introduced from 1 July 2017 will be able to benefit from significant imputation credits depending upon the proportion of the fund which is held in accumulation accounts. In these cases it will be a case of fine tuning to ensure that there are no wasted/forfeited imputation credits. Invariably funds of this size will be receiving accounting and financial advice wherever they be and hence there will be no further significant revenue gains to government among this group. Those funds which are entirely in accumulation phase and have members making concessional contributions will be able to absorb substantial imputation credits. They will need only to moderately adjust investments to ensure that there are no wasted/forfeited imputation credits. Those entirely in pension phase will be advised towards a mix of assets which produce returns via capital growth, trust distributions or shares in companies with substantially international businesses which as a result pay unfranked dividends or appropriate international exchange traded funds so as to avoid having imputation credits forfeited. As a result the revenue from this policy will diminish to a tiny fraction of that anticipated and will mainly fall upon those retirees with modest means who are not advised and who own some shares and will experience their imputation credits being forfeited. The Ned Kelly gang versus the Ben Hall gang We note that Labor’s information on superannuation funds was based on financial year 2015/2016 since not all returns are completed for financial year 2017. This means that not only was its information dated but it did not take account of the changes made by the government which became effective from 1 July 2017. Those relatively few huge self managed superannuation funds which had assets up to $100 million referred to by Mr Shorten were dealt with by the government because as a result of the changes arising from 1 July the vast majority of those assets reverted to accumulation phase from that date. Their accumulation accounts are taxed at 15%. Their overall fund’s tax rate is determined on the weighted average of pension accounts with zero tax and accumulation accounts taxed at 15%. Hence those with proportionately huge accumulation accounts will be able to utilise significant imputation credits and will adjust holdings of any surplus franked dividend paying shares to bring the forfeiture of imputation credits to a zero balance. While Mr Bowen, the shadow treasurer has indicated that 50% of the revenue Labor expects to collect will come from the largest 10% of self managed superannuation funds, this particular segment of funds will in actual fact return near zero dollars because of the combination of the impact of the changes enacted by the government from 1 July 2017 and their inevitable restructuring of investments. In this respect of these large funds Labor’s announcement conjures up the image of the Ned Kelly gang arriving in a town to rob a bank only to find that the Ben Hall gang had preceeded them. The Labor proposed imputation credit forfeiture was not corrected for the government’s changes effective from 1 July 2017 and does not factor in the flexibility of investors, particularly large investors, to change investment and deny it the ability to seize huge amounts of imputation credits. As a result, the policy will produce only a tiny proportion of the revenue it projected. We hope that Labor thinks carefully about its commitment to spend the extra $59 billion, its announcement referred to as being gained over 10 years, because most of this revenue will vanish and in many cases doesn’t exist because of the government’s restructuring of superannuation policy. It makes one wonder who advised the Labor leadership on this policy. We note that whilst Labor says it was based upon figures produced by the Parliamentary Budget Office it has refused to publish this advice and its announcement was made without any of the normal tables attached to such an announcement. Public servants in the Parliamentary Budget Office are unlikely to have given comprehensive advice on matters such as this without qualifying the risks and stating the assumptions. It therefore leads to the conclusion that this was a hasty release of an ill-thought out policy which doesn’t stand up to critical analysis. One other thing that has become apparent is that many financial writers in the press did not understand dividend imputation nor its interaction with the superannuation system. Discrimination This is a highly discriminatory tax policy which treats groups of taxpayers with similar incomes differently depending on the form in which they hold their assets. For example, if Mr & Mrs Citizen with a relatively low income have shares which pay franked dividends, the imputation credits on those dividends will be confiscated. If on the other hand, they hold assets in say listed property trusts, their income will be unaffected. Further, the policy seeks to discriminate against self managed superannuation funds compared to managed funds and industry funds but in this respect will largely miss its target.
GRAHAM MIDDLETON Director Synstrat Management Pty Ltd The Synstrat Group provides Accounting, Financial Services, Business Advice, and Financial Advice. Prepared by Synstrat Management Pty Ltd for clients of Synstrat Group. Synstrat Management Pty Ltd P. 03 9843 7777 ABN 57 006 295 325 If you are not the intended recipient of this communication please delete and destroy all copies of this message and telephone Synstrat on +61 3 9843 7777 immediately. If you are the intended recipient of this communication you should not copy, disclose or distribute this communication without the authority of Synstrat. Any views expressed in this communication are those of the individual sender, except wh ere the sender specifically states them to be the views of Synstrat. If you do not wish to receive this email in future, please reply to the sender requesting termination of service. |