Objectives of the Alliance for a Fairer Retirement
The Alliance for a Fairer Retirement System: removing the cash rebate on franking credits
An important objective for government is to encourage older Australians to save for retirement and to support the majority of retirees (58%) who take pride in being either fully or partly self-funded in retirement. This majority includes many self-funded retirees and almost half of the current 1.1 million SMSF trustees who are either in the pension phase, or who will move into that phase shortly.
The ALP’s stated policy to remove the cash rebates on franking credits for those who pay no tax will impact directly on many retirees on modest incomes and is a disincentive to saving for retirement. It infringes on the principles held by the Alliance for a Fairer Retirement System of adequacy, sustainability, certainty and fairness.
Adequacy measures the degree to which the retirement system enables people to achieve a sufficient standard of living in retirement relative either to the standard they enjoyed while working, or as compared to an objective budget standard for retirees. No single retirement income target will be appropriate for all groups. Denying the tax rebate on franking credits will have an immediate impact on many retirees and substantially reduce retirement incomes, threatening income adequacy.
An SMSF in pension mode with no age pension and $1m of savings invested in Australian shares will see a 30% drop in income.
- Current system - dividends $42,000 + franking credits $18,000 = total income $60,000,
- Proposed policy without franking credits - total income $42,000
A retiree couple with no age pension, $800,000 in shares and $75,000 on deposit in the bank.
- Investment income $36,000 plus franking credit $15,400 = total income $51,400
- Without franking credits total income for the couple is $36,000
Sustainability requires that government expenditure on the retirement income system through the age pension and superannuation tax concessions must be affordable over the long term. Changes to retirement income policy must contribute to fiscal sustainability by incentivising self-sufficiency. For many retirees, the potential loss of income under the ALP policy is a direct incentive to sell down assets and seek income support through the age pension. This is especially true in example 2 above, given that the full age pension for a couple with less than $375,000 in assets is $35,573. Upsizing to a more expensive home, for example, could ensure they receive a very similar income and preserve their assets. Placing a disincentive on saving for retirement is not good policy and threatens the sustainability of the system.
Older Australians require certainty to plan for retirement with confidence, and should have sufficient time to alter their arrangements in response to proposed policy changes. The ALP’s intention to legislate for the removal of cash refunds on franking credits, if and when they gain office, leaves little opportunity for those in retirement to alter their savings plan. Such short-term thinking completely contravenes the need for policy certainty in retirement planning and creates undue anxiety.
Fairness requires that the retirement system treats people in the same circumstances equally. The move to refund franking credits to all shareholders was undertaken with the intention that shareholders should be taxed at their marginal rate. Failure to refund credits to those who pay no tax means that their investment income would be taxed at the corporate rate of 30%. Further, exempting those receiving social security benefits means that retirees on the same income will be taxed at very different rates.
A couple on the full age pension and with $300,000 in APRA regulated superannuation.
- Age pension income of $35,573 + $18,000 in dividends and franking credits = total income of $53,573 – no change under the new policy
Compare Example 3 with Example 1. The couple who worked hard to save for retirement, and who have no age pension, but $1m in their SMSF are worse off than those who have only saved $300,000. This is not fair! It is also a clear disincentive to save for retirement and will threaten the sustainability of the retirement system.