Don’t touch my dividends, Dude

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Photo: “How will we afford dog food without the franking credits from our dividends?” pixabay.com, CC Mike Flynn

There have been few occasions when dividends made it on to the front pages or lead item TV news. The first time was when Treasurer Paul Keating introduced the dividend imputation scheme in 1987, largely as a way of eliminating the double-taxing of company dividends. From that day, Australian investors were given franking credits on the dividends they received on their shares. This had the welcome effect of boosting the investment return for the investor or super fund.  It was just the sort of incentive needed to encourage Australians to prepare for their retirement and aim to become self-funded retirees.

Keating’s scheme did not, however, include the cash refund of the franking credit component of the dividend, which was introduced by John Howard and Peter Costello in 2001.

The second time dividend imputation was ‘trending’ was last week when Opposition Leader Bill Shorten said if Labor gets back into power he would scrap the current system. While emphasising Labor would keep dividend imputation, he said the plan was to scrap excess cash refunds on tax that was never paid in the first place,

The main targets are people with super fund balances of $1 million and more. There are plenty of those distributed among the large super fund managers but also around 30% of the self-managed fund sector are in that category.

In 2017, 1.12 million Australians were members of a self-managed super fund. There were almost 600,000 funds with assets totalling $696.7 billion. About 30% of SMSF assets are held in Australian shares, the ones that pay fully franked (tax-paid) dividends to investors.

What Mr Shorten’s plan appears to lack is a sliding scale which would exempt retirees whose fund balance is below a certain threshold or whose franking credit refunds are below the average ($5,000 a year).

A 2015 study which set out to debunk the myth that one needs a minimum $1 million to retire said that half of Australia’s workers approaching retirement have less than $100,000 in super. Three years hence, the proportionate numbers won’t have changed that much. The study by the Australian Institute of Superannuation Trustees (AIST) sets out to educate people that super is designed to work in tandem with the aged pension and that it’s OK to do that. Even a low super balance of $150,000 can nicely augment your pension.

Yet Bill Shorten says some funds are paying zero tax but picking up a $2.5 million refund cheque. At face value, that would seem to be a loophole worth closing. But at the other end of the scale are individual SMSF members with low fund balances who are undoubtedly already receiving a Centrelink part-pension. The shortfall caused by scrapping cash refunds on dividends will inevitably be recovered via a tweaking of government pension calculations on income and assets. Those who do not qualify for the pension will lose the lot.

Just how important a subject this is for retirees is shown in the Association of Superannuation Funds of Australia (ASFA) superannuation statistics: 1.427 million individuals received regular superannuation income in 2015-2016. Weekly payments averaged from $328 (term annuity), $496 (account-based) and $616 (defined benefit). Franking credit refunds on dividends from the ATO no doubt contributed to these payments.

Some industry super funds have come out in favour of Labor’s plan, but there is plenty of opposition, though so far there is no detail on which to base a counter argument.

ASFA says the proposal could have a significant impact on low-income retirees both inside and outside the superannuation system.

Chief executive Dr Martin Fahy said the system already has a $1.6 million cap in the retirement phase and reforms to superannuation and  retirement funding are working but they need time to bed down.

“If there is a concern about individuals with large retirement savings receiving the benefit of refundable imputation credits then this would be better addressed by measures more closely linked to retirement balance,” he said.

Currently, the Australian Taxation Office demands that if SMSF Trustees draw a Simple Pension, it must be a minimum 5% of assets (rising through increments to 14% for those aged 95 and over (!). For example, a fund with two members under the age of 80 and a balance of $450,000 must pay its members a minimum of $25,000 p.a. Providing their other assessable assets and/or income is under the threshold, they can also receive a part pension from Centrelink which could bump their annual income to around $45,000, (somewhere between a modest living and a comfortable retirement). The upside (for the country) in this fiscal strategy is that earnings will (hopefully) keep the members’ balances in the black for as long as possible. This in itself eases the burden on the aged pension system.

And if you need extra cash for a car, a bucket list trip to the Antarctic or to pay a ransom to a hacker, you can take a lump sum. If you’re Homeland’s Carrie Matheson, track down the troll, beat him up and demand he unlock the computer. (He just threw that in for light relief, Ed).

Policy on the run

You will forgive me for liberally quoting other sources on this thorny subject. The ALP has not published a policy paper or issued a media release. The only thing you will find is on Mr Shorten’s website, tucked away under the category: ‘Bill’s Opinion Pieces’.

I initially found Bill’s piece on a website run by the authority on all things super, Trish Power. Power, starting from the same position as all, except for Fairfax Media, which ‘has seen’ a policy draft, suggests it has all the hallmarks of ‘policy on the run’.

Trish Power’s website is a good place to visit if you want to avoid the scaremongering stories in the tabloids and current affairs TV. I bought a copy of her book “DIY Super for Dummies” and found it invaluable when starting our SMSF back in 2006. It may be overstating to say the promise of franking credit refunds was one of the attractions, but nonetheless it was.

Power and other guest writers are following this story while it remains a live issue so if you have a vested interest, here’s the link:

It does seem as if Bill Shorten is hanging his hat on this particular peg and plans to leave it there.

“When this (cash refund) first came in, it cost Australian taxpayers about $500 million a year,” he wrote. “Within the next few years, it’s going to cost $8 billion a year, more than the Commonwealth spends on public schools or childcare. It’s three times what we spend on the Australian Federal Police.”

You can see where he is shining his head torch when he writes that 50% of tax refunds go to SMSFs with balances of more than $2.4 million. Fine, stick it to the top end of town, but look further into this dodgy policy, Bill, and you will see that unless you giveretirees on modest incomes a break, they will be forced to rely more on the public purse. They will resent that and in turn resent you.

FOMM back pages: http://bobwords.com.au/super-end-week/

 

 

ATM fees abolition a smoke screen?

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One of several “enhanced” ATM’s located in the Alberta Arts District of Portland, Oregon. Photo by Ian Sane https://flic.kr/p/X2R8op

If you were feeling all warm and fuzzy about the Big Four banks deciding to drop the hated ‘foreign’ ATM fees, sorry, the feeling won’t last. For a start, the Commonwealth Bank’s decision to go first didn’t last long. The CBA announced the fee abolition early on Sunday (aiming for a slow news day lead). But within hours, Westpac, the ANZ and National Bank of Australia had all suddenly (on a Sunday) released statements that they had come to the same point of view. The likely reason is that the boards of all four banks (and others) have had the ATM fees item on their agendas for a while now, just waiting for the right time to tell their media people to press “go”.

And they make it sound like they’re doing us all a big favour. Banks have been gouging ATM fees (typically $2 or $2.50) since the Reserve Bank of Australia first said they could, in March 2009. The main ‘victims’ of this unjust fee (for using an ATM owned by another bank), were the people who travel interstate or intrastate and had no choice.

RBA data tells us there were 251.65 million ‘foreign’ ATM withdrawals in the last financial year. Deutsche Bank estimates the Big Four have foregone about $117 million by dropping the ATM fee, according to the Australian Financial Review. But that’s a modest amount compared to the $4.4 billion we collectively pay out in bank fees every year.

RateCity analysis of RBA data shows the average mortgage holder paid $471 on banking fees last year. That includes $240 a year in home loan fees and $231 in credit card fees.

In this context as some have suggested, the ATM fees abolition story is a PR smoke screen. ABC senior business correspondent Peter Ryan said of Sunday’s news coup…“the planned, if not co-ordinated, decision is mostly about banks doing what it takes to avoid a royal commission into bad banking behaviour.”

The most recent media disclosures about money laundering allegations compound other image issues for banks, including financial advice scandals and allegations of market manipulation and misleading conduct.

While the big bank PR people might be spinning this as “listening to our consumers”, the real story is ATMs are becoming less popular.

Reserve Bank of Australia (RBA) data shows ATM use is falling and falling sharply. Monthly withdrawal transactions have fallen from a high of 78.427 million in December 2008 to 48.684 million in January 2017.

Banking analysts ascribe this sharp downturn in ATM use to the now ubiquitous “tap” method of paying for anything from a Mars bar to a week’s worth of groceries. There is also the “any cash out?” query whenever you spend money in a supermarket or bottle shop.

Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, says new technologies will soon be launched that further undermine ATMs. The biggest will be the New Payments Platform (NPP). Another is OSKO, a new payment mechanism from the developers of BPAY.

McConnell writing for The Conversation, says the NPP will change the way that payments are made in Australia.

“Rather than putting a payment on a credit card or waiting a few days for a payment from another bank to clear, with NPP payments will be cleared in a few minutes or less. Using NPP, anyone will be able to make an almost instantaneous transfer of funds into the bank of a supplier, such as a plumber.”

As McConnell puts it, with NPP, everyone with a smartphone and spare cash is an ATM.

Technology changes go some way to explaining why so many bank branches are closing or relocating to kiosk-style retail outlets. Last week, for the first time, I withdrew cash from an ATM outside the local Bank of Queensland branch. I did so because the Suncorp branch in Maleny closed in mid-September and with it went the Suncorp ATM. Suncorp’s advice was to use (a) the BOQ-branded ATM across the road or (b) withdraw cash at the Post Office. Transaction duly completed, I was pleased/relieved to find that I was not charged a fee for using the other provider’s ATM.

(Incidentally, Suncorp announced on Tuesday it would scrap ‘foreign’ fees on its 400 ATMs Australia-wide by the end of December).

There are still six ATMs in Maleny, although the jury is out as to which won’t charge a fee if you bank with someone else.

In case you didn’t know, some ATMs (the ones found in pubs, casinos, convenience stores, roadhouses and other retail outlets) may charge you a fee regardless. What the Big Bank decision to scrap ATM fees means for their business model remains to be seen.

Maleny has just two banks left (Bank of Queensland and Maleny Credit Union (now called MCU Ltd). The ANZ left its ATM in place and established a mobile business bank at the other end of the street.

Since 2007, the number of bank branches in Australia has dropped from 6,600 in 2007 to fewer than 5,600. Branch closures are ongoing, with the Finance Sector Union recently revealing Westpac branch closures in Western Australia and Victoria.

When our local Suncorp branch closed, we went in to check out rumours of cake. Yes, there was (gluten-free) cake, iced in Suncorp colours.

We popped in to say “bye”, but ironically tellers were too pre-occupied serving customers for other than a quick “thanks and good luck”.

What’s bothering me more, honestly, is my habit of collecting gold coins in a container and, once I have $100 or so, banking the cash in my account. Oh, you do that too? The gals at Suncorp didn’t have a problem with this old-school habit. We were told (by Suncorp) we could do basic banking business at the local Australia Post branch. I queued up yesterday, banked $30 in gold coins and it was no drama at all. I even got a receipt.

Now, about that late fee for missing a credit card payment by one day…