Burning your money is probably illegal but if you are a pensioner it might save your franking credits.
Under the proposed policy by the Labor party, franking credits will not be refundable unless you qualify for the pension. This is certainly a big incentive to qualify for the age pension.
Let’s look at an example.
If you are a single home owner with $550,000 invested in shares you will still get $1 in pension. If those shares are fully franked you can expect about 4.5% cash dividend and 1.93% in franking credits. That is $10,615 in franking credits. As the law currently stands, tax on your income of $35,366 would be $972 and $112 in Medicare levy, leaving a cash refund of $9,530 that is $183 a week.
If you have that $550,000 in a superannuation fund in pension phase then no tax or Medicare would be payable and you would get the full $10,615 a year back.
Under the latest changes to Labor’s policy, if you make the mistake of not spending all this income but save $2,000 then you will fail the asset test and lose your $1 in pension which means you will lose your $9,530 refund and be at least $183 per week worse off. Which is a lot of money for someone living on $35,365 a year.
Fortunately, there are gifting provisions so you could give it away but no more than $30,000 over 5 years or $10,000 in any one year. If you have already given your limit to your children and charities and you really can’t find any other way of getting rid of the money I encourage you to burn that $2,000 to make yourself at least $9,530 better off every year from franking credits. In fact, if Labor win the next election I think we should all protest by standing in the streets and burning money to prove the point.
Of course, there are plenty of different ways this problem can arise, including people under age pension age living off their savings while they care for parents or children. The point is a lot of people with an income level equivalent to just the minimum wage will lose 30% of their income while the wealthy will not be affected.
Labor might get to collect some tax from people too old to be on the ball and leave the $2,000 in the bank or people, living off meagre savings, who have not yet reached age pension age. But for the majority of people currently receiving a refund of franking credits, here are just a few ideas on how they will be able to avoid losing them. The wealthier you are of course the easier and more profitable this is.
- Move investments out of companies that pay tax in Australia. Alternatives are property trusts, direct property or bank interest where the profits come direct to you before any tax is paid in Australia. Or invest overseas rather than generate jobs in Australia.
- If you have a SMSF simply move the portion of your superannuation that you want to invest in Australian shares into a public fund. This may mean you pay more in fees but is still cheaper than losing your franking credits. Note self-supporting retirees with their money outside of super will probably not qualify to move their savings into a public fund. So, the well advised wealthy will be in a better position to make this move than a person who has simply been saving and considered superannuation too uncertain.
- Make sure you have only enough invested in Australian tax paying companies that the franking credits offset the tax on your other investments. Of course, this will only be useful to people with their saving in superannuation if they have more than $1.6 million.
- Bring your adult children into your SMSF and use your franking credits to pay the “contributions tax” on their employee contributions then roll the money straight out tax free into any superannuation fund they would have invested in anyway.
- If you are a single homeowner with not much more than $552,000 in investments other than your home and have already given away $10,000 this year, take a leaf out of granny’s book and burn enough cash to bring you down below $552,000.
All in all this proposed policy is unlikely to create much extra tax revenue. But it will make people change their investment strategies away from tax paying Australian companies, pay more fees to public superannuation funds or burn their money in the street. It certainly won’t be the very wealthy that will be worse off, they can afford advice on complex tax laws.
The problem is not franking credits being refunded, after all they are just the tax that the company has paid on the investor’s share of the profits before it is distributed to them, something that does not happen in other types of investments. The problem is that there is far too much money in superannuation that is being sheltered from tax, at the big end of town.
Fiddle with things like franking credits and you interfere with market forces in the economy, you create an incentive to earn less income and create complexed laws that only the wealthy can manage to manipulate.
Why isn’t Labor going to the real problem? Simply tax these excessive amounts sitting in superannuation.
Due to recent changes, people over 60 can only have $1.6mil invested in pension phase where no tax is paid on the earnings. The tax saving here is about the equivalent of the full age pension. So, they don’t need any further tax benefits to reward them for being self-supporting in retirement, they are already costing the budget as much as a full age pensioner. If they have more than $1.6mil inside superannuation they can put the excess into a superannuation accumulation account where it will be taxed at only 15%.
If say, you receive an inheritance after you have retired then you may have to invest it in your own name due to the superannuation contribution rules. Still probably no tax payable because the superannuation pension you already have, does not even go into your personal tax return so you will get the first $18,200 in earnings, on the inheritance, tax free and then through the tax brackets, you may even qualify for the senior Australians’ tax offset and pay no tax on $32,279 in income outside of superannuation.
There is a much simpler solution, charge at least 30% on that superannuation sitting in accumulation phase, when the total superannuation balance is more than $1.6mil. That will soak up the franking credits anyway but only effect people who can afford to pay. There is nothing complicated about it, no extra laws, just change 15% to 30% in the current laws.
The next simple solution is to create one more box in an income tax return where the amount that has been receive tax free from superannuation is entered. This amount is not taxed but will be taken into account in determining which tax bracket the other income is taxed at. Thus, fully utilising our already established ability to pay based taxation system. Instead of punishing people, who invest in tax paying Australian companies, by taking more than $10,000 a year off people living on $35,000 a year.
I would like to bet that this would raise more revenue anyway.
I am sure the reason tax legislation is so unnecessarily complicated is so that the wealthy don’t have to pay tax! Gives you an idea of where Bill Shorten is getting his advice.