05 Apr Is Labor’s franking credits policy justified?

We all know that governments like to make budget cuts. Especially if they think the average punter won’t care or notice. It allows them to spread the cash around to other areas, ones that are generally more popular with the voting public.

Do they need to be fair? No, of course not. If you can take a wad of cash away from one group of people, and pass it onto another group of people, losing fewer votes with the losing group than what you will gain with the winning group – then you have yourself a great political policy.

And there is nothing like an election for a political party to make grand sweeping gestures. And this time around Labor have outdone themselves. They’ve thrown in all their chips and are having a crack at just about everything. The 2% levy on the highest income earners will be reinstated, family trusts will have a minimum 30% tax rate, the threshold from tax on super will be lowered by $50,000, multinationals will be targeted, negative gearing will be stopped for existing properties, and the capital gains discount for assets held over twelve months will get a haircut.

I must admit, I don’t have a problem with much of this. Sure the 2% levy is just a tax grab, but if you’re earning over $180k per year then losing 2% is hardly going to put you on the breadline. Family Trusts have been the ultimate tax dodge for years, and once again the laws are targeting the wealthy and the savings can be better used to build hospitals or schools, or pay for their recent $3.2 billion commitment to cover out of pocket expenses for cancer sufferers. Who in their right mind can argue against that?

As for negative gearing, it was designed to increase the housing pool. So getting cash back from the government when buying a house or apartment that has already been built achieves nothing. Restricting negative gearing to new properties will have the originally desired outcome of creating new, much-needed, housing. I’m totally fine with that.

Is it a cash grab?

So that brings us to Labor’s biggest cash grab for the 2019 election. The one that will save them the most dollars, but the one that I think is by far the most unfair and inequitable. The controversial abolishment of the franking credit rebate.

You can see why they want to target it. It’s worth over $10 billion to them. It’s double the savings of the 2% wealth levy which will bring in $5 billion, the family trust savings will get them $4 billion, while negative gearing is only going to bring in $2.5 billion. It’s by far the biggest cookie in the cookie jar.

But just because it’s a big cookie, doesn’t mean it should be eaten. The difference between this policy and the rest is that it targets everyone. The rich, and everybody else with it. It’s like when a fishing trawler throws out a massive net into the ocean. Sure, you’re going to haul in some big fish, but you’re also going to catch a whole lot of little ones in the process.

The main problem here, however, is that the smaller fish are the ones that are going to be hurt the most. Those retirees that don’t have an income, but have spent their whole lives working hard, paying taxes, saving money, making smart investment decisions, to the point where they’ve built up a strong share portfolio of dividend-paying shares. These dividends and the franking credit refunds that go with them, have to this point, provided them with a standard of living that they have built themselves and which require no handouts from the government.

The wealthy will be fine. Since the July 2017 changes those with over $1.6 million in retirement phase super will generally be paying some level of tax. Tax which can be offset by? You guessed it, franking credits. And usually, anyone with serious money can structure their tax so that they aren’t paying anything anyway. But that’s a topic for another day. The fact remains that those with smaller amounts in their super won’t get the advantages that those richer than them receive. Is that fair? Does that make sense?

Why were franking credits first introduced?

Franking credits were originally created to stop the “double taxing” of company profits. That is, a company would pay tax on any profit they made, then the excess would be paid out in a dividend to shareholders, and the receiver would then pay income tax on that same profit. The franking credit alleviated this by giving a tax credit to the shareholder.

For those that were paying tax, it was basically a cash payment. But this disadvantaged those that weren’t paying taxes. They had nothing to claim the tax credit against. Hence the cash refund was implemented for those that were non-taxpayers. Why should non-taxpayers be discriminated against just because they were of retirement age? As far as I’m concerned the argument still stands. Why is this equality now being taken away?

The thing that I find most frustrating is that these policies have been in place for well over a decade. Well-meaning Australians have had the opportunity to set themselves up, in modest retirement, following the rules that they have been given. Yet when they finally get to retirement the rules have been changed. They have literally moved the goalposts on them. The rug pulled out from underneath them. Is this fair? Is this equitable?

Why, at the very least, are the changes not grandfathered like the negative gearing changes are? Why, instead, could there not be a cap placed on any refunds rather than totally wiping out the refund for everybody, thereby protecting those people who deserve protection.

They are important questions, and ones we hope Labor will hear as we head closer to the election. Over the next few weeks, we’ll take the opportunity to discuss the chances of this policy actually getting through and what the consequences will be if it does.

What are the chances of Labor winning the election? Will the legislation be passed through parliament even if they do? With enough political pressure, can the policy can be amended to make it fairer for all? What plans should we have if the legislation does pass in full? What investments should we be looking at if high dividend yielding stocks are not as attractive?

It’s important to try and defend our rights, however, we also need to be prepared for an adverse outcome. The better prepared we are the better we’ll handle any changes if and when the time comes.