Many of the investors turning up to the federal government’s inquiry into the policy claimed they would lose $20,000 or more a year.
Accountants who have crunched the numbers find that retirees would need somewhere between $900,000 and $1.2 million of stocks generating average dividend yields sitting in an SMSF’s share portfolio to generate a $20,000 refund.
A report by CEDA released on Friday confirms that over 50 per cent of franking credit refunds cheques go to SMSFs with over $2 million in assets.
“The dividend imputation tax credit when introduced in 2000 was set to cost the federal budget $550 million, it now costs $5 billion,” CEDA chief executive Melinda Cilento said.
“The majority of this $5 billion is going to individuals with substantial investment portfolios. It is appropriate to wind this back in light of broader fiscal challenges ahead.”
Ms Cilento said the changes should be carefully introduced to ensure that self-funded retirees relying on more modest investment balances and incomes were not unduly hurt.
“This approach is consistent with the well-targeted approach that Australia seeks to maintain through its tax-transfer system,” she said.
“In the absence of more substantive tax reform, these are modest changes in the right direction that are achievable and will assist with long term budget discipline.”
Pensioners are exempt
Franking credits represent the amount of tax already paid at the corporate level. This can be used to offset tax owing at the individual level.
For those paying low or zero rates of tax, such as super funds and retirees, excess franking credits are paid out as cash refunds. Labor plans to keep the tax credits flowing but will remove the refund element.
There is an exception: Labor’s “pensioner guarantee”. It means that people receiving an age pension – either full or part – or allowance from the government will still receive refunds.
The term “pensioner” can be a bit confusing in this context – it is a pension of the type Centrelink pays, it does not apply to account-based pensions drawn from super funds.
The pensioner guarantee also extended to SMSFs with at least one member receiving a government age pension on or before March 28, 2018.
That means going forward, the only pensioners denied the full value of franking credits will be those with SMSFs.
Labor’s changes – which are of course contingent on the party winning the next federal election and getting the policy cleared by parliament – will generate $55 billion in revenue over a decade.
Other tax reforms
The CEDA report backs changes to wind back the 50 per cent capital gains tax discount, which it says has become too generous and mainly benefits the rich. Labor’s plan is to cut the discount to 25 per cent.
“The best available analysis suggests that most of the benefits of the capital gains tax discount fall to higher incomes,” CEDA says.
It is more equivocal on Labor’s plan to limit negative gearing to the income earned from the assets.
“On balance, CEDA considers that the case for reducing the capital gains tax discount is probably stronger than the case for limiting negative gearing.”