Digesting the ALP's dividends plan
For retirees, the best move now is not to do anything.
Summary: There’s a lot of media and political scaremongering right now over the ALP’s plan to abolish dividend franking credit cash refunds. But don’t make any rash investment decisions.
Key take-out: Any changes would be subject to Labor winning the next election, getting legislation drafted and passed in Parliament, and are likely to be watered down from the ALP’s first policy draft.
It almost goes without saying, but governments love playing around with Australia’s superannuation system.
We’ve all seen many changes over the years, most recently with the Turnbull Government introducing a range of new rules to reduce how much one can actually contribute into superannuation annually to $25,000 (as a concessional contribution), and limiting the total amount of funds that can be held in a tax-free pension account after retirement to $1.6 million.
At the start of last year more new legislation came into effect, making it even harder for individuals and couples in retirement to qualify for the government age pension if the value of their assets outside of the family home (including superannuation) exceeds certain levels.
Now, there’s another significant threat to retirees in the wings, this time in the form of the proposal from the Australian Labor Party to remove the ability of retirees holding shares to claim a cash tax rebate from any company dividends they receive.
The ALP claims this measure would claw back almost $6 billion a year (a figure being disputed by the Government), and only affect “wealthy” retirees with large amounts of capital (with self-managed super funds clearly the ALP’s key targets).
But the reality of the ALP plan is very different. Indeed, any retiree holding shares and receiving tax refunds from their fully franked dividends (even low income earners) would be impacted.
Financial adviser Bruce Brammall explained in his column last week that the ALP’s plan would deal a body blow to many more retirees than the ALP claims. Figures just released by the Federal Government show that 243,000 full and part age pension recipients would actually be caught by Labor’s policy if it remains unamended.
There’s a pretty good chance it will be amended, with Opposition Leader Bill Shorten and Shadow Treasurer Chris Bowen likely to put some sort of safety net under low-income earning retirees (to stave off an even bigger backlash).
Why we have a dividend imputation system
Dividend imputation was introduced some 30 years ago, to avoid the double taxation of company income. Because most Australian companies are taxed at 30 per cent these days, when a fully franked dividend is paid it comes with a tax credit attached for that 30 per cent of tax already paid by the company.
Using Bruce’s example, if you receive a $700 fully franked dividend, it really means that $1000 has been earned by the company, with $300 tax (30 per cent) already paid. The investor receives the $700 dividend, with a ‘franking credit’ for the other $300.
If you are in pension mode, and paying no tax on your income, the whole $300 in franking credits are returned to you as a cash rebate. A person still in superannuation accumulation phase pays tax at 15 per cent, so they would get up to half of franking credit back, or $150.
If the ALP’s plan comes to fruition, you can kiss those cash refunds goodbye. Which will be a bitter pill to swallow for many retirees who may own a few shares through their pension fund, and who rely on generating some additional income via dividend franking credits to supplement their age pension payment income.
That dividend income is not a handout. It is simply the rebate on the tax that has already been paid by the company.
What do you need to do?
You may already be reading daily media reports on this unfolding saga, warning that there will be large flows of money out of stocks paying fully franked dividends into companies with higher dividend yields (perhaps listed Real-Estate Investment Trusts, utility and infrastructure companies), international stocks and exchange-traded funds.
But such talk is premature. Don’t do anything now.
The first thing to consider is that since unveiling this plan, the ALP has come under strong attack, not just from the Federal Government but from many other segments of the retirement and financial services industry.
As noted, the Opposition will almost certainly have to go back to the drawing board to revise its plan and, even then, this change would only come into effect if the ALP wins government at the next election and it is able to pass the legislation through Parliament at a later stage. Think late 2019, at the earliest.
So definitely don’t make any rash changes to your investment portfolio and strategy at this point in time. It’s still very early days.
In the words of former British Prime Minister Harold Wilson, “a week is a long time in politics”. Things can (and invariably do) change.
But, if this did come into law down the track, many retirees may be forced to review their share investments and move assets into other more tax-effective areas and those offering higher yields.
It’s definitely worth looking at future options (if they’re needed), but at this point, while the political dust is still settling, it’s just a matter of keeping a close watch on Canberra as our politicians go into battle.
If you are concerned, or want to weigh up your investment options, it’s always best to seek out professional financial advice.
Source: Thursday March 22, 2018 – Eureka Report, Your Daily Morning Brief.