Don’t touch my dividends, Dude

Photo: “How will we afford dog food without the franking credits from our dividends?”, 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:



Chasing the youth vote

Melbourne climate change rally, photo by John Englart

Some of you may remember Federal Opposition leader Bill Shorten’s bid for the youth vote last year, proposing a voting age of 16. There was a hue and cry about this (in the meaning of a loud public outcry…from the French huer or loud cry). Shorten’s gambit coincided with his worst-ever polling (17%) in the preferred leader stakes.

The nation’s voting age should be lowered to 16, he said, because young Australians do not see their views reflected in Parliament. Shorten told the New South Wales Young Labor conference in Sydney that if people aged 16 and 17 could drive, work, pay taxes, join the military and make choices about medical treatment, they should be allowed to vote.

As the law stands, you can apply to be on the electoral roll at 16 or 17, but cannot vote until you turn 18.

The magic age of sweet sixteen triggers the legal right to say yes or no to some interesting things without asking one’s parents.

This notably applies to consensual sex (careful, the sex has to be with someone who is also 16 or older). If you live in South Australia or Tasmania, the age of consent is 17, and in Queensland, the law differentiates between homosexual sex (18) and carnal knowledge (16).

In most states and territories, a 16-year-old can move out of home without their parents’ consent and unless they are at risk, child welfare authorities are unlikely to force the youth to return home. Teenagers with a need to know about their rights, wherever they live, are often referred to

Shorten wisely stayed away from the issues that provoke family brouhaha (a state of agitation over something relatively minor) like consensual sex, the right to leave home and the rights of (a girl) to be prescribed contraceptive pills.

He hedged his bets by including 17-year-olds because, for example, the Australian Defence Force only admits people aged 17 and over, although they can apply at 16. You can get a driver’s licence at 17 in all states and territories except the NT (16 and a half) and Victoria (18). At 16 you can leave school, work full-time, join a union, join an industry super fund, pay taxes, apply for legal aid, consent to medical and dental treatment and get your own debit card without involving Mum and Dad. You can get married, but Mum and Dad have to sign off, likewise if you apply for a passport. A 16-year-old can’t buy cigarettes or alcohol, although their peer group will smoke and drink if someone else buys it for them and it is consumed in private.

Shorten talked about other jurisdictions where people get the vote at 16, naming Austria, Scotland and Brazil. There are eight other countries where people get the vote from the age of 16. But there are just as many jurisdictions which cling to a voting age of 21.

In Australia, the latter was dropped to 18 in 1973, just one more major reform by the far-sighted Whitlam government.

Shorten’s big play for approval to drop the voting age was to tell us that more than 17,000 Australians under 18 paid $41 million in taxes (2012-2013 data). But his admission that 400,000 people aged 18-24 are absent from the electoral roll was not a great selling point. And it’s a bit early to say how many of them signed up for the 2016 election by the time the roll closed on Monday, May 23.

Kids are too immature to vote, aren’t they?

Many of the online replies to the ABC’s report panned Shorten’s youth vote idea, although Treefrog said if 16-year-olds were disadvantaged by policy (education cuts in the 2014 budget), they should get a say. Some wanted the voting age raised to 30 because ‘anyone under 30 was too immature to make the right choice’. Oh, and some correspondents wanted optional voting for the over-60s because ‘they have too much influence on public policy’. The public reaction to Shorten’s suggestion seems in line with an Australian Election Study in 2010 in which  94% of respondents opposed any change.

An analysis of Newspoll data by the Whitlam Institute, updated in 2013, suggests the youth vote may have determined the outcomes of the last four Federal elections. Director Eric Sidoti says of the research he did with Dr Chris Brooker that the collapse of the youth vote for Labor between 2007 and 2010 among 18-34 year olds and their intentions to switch to the Greens went a long way to explaining the hung parliament.

Despite a relatively high level of non-enrolment, many young people (15-24) are now directly engaged in big issue politics – human rights, racism, the economy and the environment. The Sydney Morning Herald said organisations like GetUp! And the Australian Youth Climate Coalition provided a glimpse of this changing political landscape.

Those who doubt the ability of youngsters to make informed political decisions should check out this elegant piece of research forwarded by Mr Shiraz. It tests voter turnout and the quality of choice in light of Austria’s decision to lower the voting age to 16 in 2007.

This is a weighty document but worth reading to reach the authors’ conclusion that: “a key criticism of lowering the voting age to 16 does not hold: there is little evidence that these citizens are less able or less motivated to participate effectively in politics.”

Smart kids with important things to say

The Whitlam Institute’s What Matters essay competition reveals more reasons why the youth vote is important. Overall 2015 winner Amelia Browns of Sutherland Public School (Grades 5 and 6) wrote a touching essay “Ben Matters’’ about losing her baby cousin to Spinal Muscular Atrophy (SMA).

Runner-up Madeleine Sylvester of St Agatha’s Catholic Primary School (also in grade 5/6), urged Australians that “Watts Matter,” explaining how our households squander electricity. Other category winners wrote about refugees, climate change, endangered species and the importance of physics. So tell me again why teenagers are not ready to vote at 16 or 17? These students, aged 10-14, are already putting together lucid prose that demonstrates they have a handle on the world and ideas to make it a better place.

Sunshine Coast songwriter Karen Law brought her family band to our lounge room a couple of week ago. The repertoire included a song about Nauru, written by Karen’s 13-year-old daughter Hazel. “What will they do with the island, in five years,” the writer putting herself in the asylum seeker’s sandals.

“Why do I keep living when no-one throws a thought my way?

So is something wrong with me, or something wrong with you?

Do you feel pain, or are you just oblivious

To the world you’re standing in?

There could be a hidden message in “What will they do with the island, in five years” – ostensibly about the government’s promise to process everyone on Nauru within five years. In five years Hazel Law, who shows a capacity at 13 to think and feel deeply about social issues, will be 18. If Bill Shorten gets the keys to the Lodge, she might even be eligible to vote at the next election, circa 2020.