No Images? Click here November 2018 Labor Franking-Imputation Credit policyLabor’s policy pronouncements are misleading The policy was stated to have been fully costed by the Parliamentary Budget Office. This is not true as the PBO excluded from its study a number of groups including the following:- · Members of small APRA regulated funds. These are small funds of similar size to SMSFs which are administered by a professional trustee under APRA regulations rather than administered by a superannuation administrator or accounting practice under ATO supervision. · Retired small business owners with equity invested in small private companies. There will be a myriad of these where Mum and Dad retire and hand over management of a family business to their children but retain a portion of ownership and receive dividends. · Australian shareholders on income less than $65,000 per annum of which there are a multitude living in retirement with their retirement partially funded by investments and partially funded by a drawdown on their capital. Other misleading facts Labor’s Shadow Treasurer Mr Bowen claims that this is a measure aimed at the wealthy. In reality, this is bunkum. Truly wealthy investors say investors with $100 million in a private portfolio and receiving say $5 million worth of grossed up dividend income per year have marginal tax rates of 47% including Medicare levy as well as average tax rates, both of which are above the 30 cents in the dollar company tax rate of large companies. They will be able to utilise every cent of their imputation credits to offset their tax bill. They are unaffected by the policy. By contrast, small investors such as Mum and Dads living in retirement with modest income below say $60,000 of joint income which includes franked dividends on their shares, will have all or most of their imputation credits confiscated under Labor’s policy. The rich investor is unaffected, the poor investor has imputation credits confiscated. This is the opposite of what Labor claims to be true. Large Superannuation Funds versus Small Superannuation Funds In its original announcement Labor referred to some Self Managed Superannuation Funds with over $100 million of assets! I read separately that there apparently there are three of them somewhere in Australia. Since they are restricted to having four members under existing legislation but may only have two, typically being a Mum and Dad combination, and even if they do have two of their children in the fund, it would probably only be the Mum and Dad who would be drawing down superannuation pensions being at retirement age. Their children are likely to be well below retiring age. Hence out of $100 million in such a fund a likely maximum of $1.6 million each for Mum and Dad would be in pension paying accounts which are tax free. The remaining $96.8 million would be in accumulation phase accounts taxed at 15%. Such a fund would have an average tax rate 14.52%. it would simply need to balance its assets in such a way that grossed up franked dividends were slightly below half of its income and it would then be able to offset all its imputation credits against its likely tax bill and hence have no imputation credits confiscated. But again by contrast a smallish Mum and Dad superannuation fund paying out pensions and running down in retirement with say $1 million of assets would have a zero tax rate and all of its imputation credits would be confiscated under Labor’s proposal. Alternatively it will be able to have no investment in companies paying franked dividends. Again this is an example of a very large fund and the modest fund shows that the application of Labor’s policy hits those with less assets rather than those with huge assets. This is the very opposite of what Labor’s Shadow Treasurer Mr Bowen has been saying is the case when he claims that it is a measure set against the wealthy. More bunkum. There are a multitude on modest incomes who through historical events own a few shares in AMP, which having been AMP policy holders they received when it demutualised, as well as shares in other demutualisations. There are also those who own shares in Telstra, Commonwealth Bank or Medibank Private which they acquired under various offers by the Government when those businesses were privatised by the Federal Government or those who were customers of Woolworths and subscribed for shares when it was recapitalised and floated following the Adsteam disaster of the 1980’s. Under Labor’s proposal people who are on modest incomes who own shares will have their surplus imputation credits confiscated. Again, it’s a tax on those very low in the economic spectrum. This policy ends up hitting those who are relatively low down in the economic spectrum whilst it will be easily avoided by the wealthy. SMSF’s avoiding this measure Those with SMSFs entirely in accumulation phase ie those who are working and contributing have very little to worry about because with a little bit of fine tuning they will arrange their fund in such a way that their imputation credits match the fund’s tax liability. That tax liability is based on 15% of grossed up taxable earnings including 15% of concessional contributions per annum. By having around half their income derived from grossed up franked dividends the imputation credits will easily be absorbed in the tax liability of their fund. The other half may be in practice premises (if appropriate to overall circumstances), shares not paying franked dividends within Australia such as CSL which earns most of its income internationally, pays low dividends but has been a magnificent growth stock, holdings in international exchange traded funds and holdings in AREITs, etc. People in these circumstances should seek appropriate professional advice. Synstrat Management Pty Ltd is confident that it will be able to steer its clients’ superannuation funds through these pitfalls. A consequence of adjustments to investment policy across a wide spectrum of Australia will result in the Labor policy, if implemented, achieving much lower revenue than their optimistic forecasts. One wonders whether the Parliamentary Budget Office was able to properly assess the change in behaviour which will arise out of this policy. Mr Shorten and Mr Bowen don’t understand the application of their own policy. Best wishes to all Veterinarians, Graham Middleton
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