Dollars and Sense: Franking credits tax fails
THE election is over and the fat lady has sung. Pity those in the Labor party who tried to sneak in a tax increase by abolishing cash refunds for unused franking credits.
This prized centrepiece of Labor's tax plan was one reason for the groundswell of public opinion which put this team of amateur socialists back in its box.
I've lost count, over the years, of the number of arguments I've had with accountants over the value of franking credits. Few people genuinely understand what is, essentially, a system of having a company pay tax up-front, working out what tax a shareholder should really have paid, and then refunding the difference.
Prior to the advent of franking, shareholders in companies paid tax at an effective rate of up to 72.4 per cent.
This "double taxation” contributed to all sorts of economic distortions, which constrained growth, cost jobs, and undermined shareholders' influence.
Initiated under the Hawke/Keating government, the advent of franking was an economically sound policy, and it was fair. It was made even more fair under the Howard government, which essentially brought the tax treatment of dividends in line with alternatives such as rental income and interest.
The fact is, franking credits are not a tax dodge, they represent legitimate income. That is how they are treated in your tax return, and that's how they manifest in real life, and there's a very good underlying reason as to why they exist. If Shorten and Bowen had their way, middle-class self-funded retirees would, if they pay no tax otherwise, miss out on franking credits and default to the company tax rate (generally 30 per cent). How can that have been "fair” when Labor specifically exempted people receiving the age pension, and genuinely wealthy people are not affected. Basically, this policy was a retirement tax on the middle class. Labor got caught out.
The policy was in fact, as outrageous as it was cynical. Outrageous because it patently favours one group of retirees over another, cynical because too few people understand matters of personal finance, and franking credits in particular. Not only that, it benefits industry funds - which are close associates of Labor and either reallocate the value of franking credits internally or use questionable accounting treatment to benefit retirees at the expense of savers.
When push came to shove though, people got clued up. Politicians missed this and just weeks after the initial announcement Labor began back-pedalling, offering to exempt certain investor classes. The upshot is that Australian shareholders most affected would have included people with combined assets of:
- More than $850,000 (excluding the family home - because they are likely not eligible for the Government pension), or
- Less than an individual $1.6 million in superannuation (because individuals with super balances greater than $1.6 million pay tax with respect to those balances).
That's a lot of people, and many were traditional Labor voters. Unsurprisingly, they weren't happy, so much so that Labor removed its detailed tax policy from the internet. Surely that was an early sign.
The franking credit issue represents very poor form, but it's just one socialist assault on a perceived "upper class”, which of course includes the very people who create jobs and income. With the following proposals still seemingly on the table, Labor just won't take the lessons on board.
- Reducing take home income for anyone earning over about $40,000 per annum
- Changing tax treatment for many rental properties, which if the experience of the 1980s is anything to go by, will see rents go through the roof as the supply of rental housing will be decimated (which is disputed, but I was in Sydney at the time and I well remember the lines outside rental properties, and the dodgy tactics agents applied to someone trying to make an inspection).
- Increasing capital gains tax, which affects all taxpayers with non-household assets, including super funds in accumulation phase
- Imposing a $3000 cap on managing tax affairs. That might sound like a lot, but it's not if you are working, have a family trust or an SMSF, have to provide detailed data to Centrelink, or are in dispute with the ATO, or a former spouse.
- Imposing a minimum 30 per cent tax rate on family trusts, which, like the self-funded retirees mentioned earlier, crucifies those people who saved something, are on a zero-tax rate and receive income from a discretionary trust.
- Reducing the amount that can be contributed to superannuation out of savings.
- Increasing superannuation tax for anyone earning over $200,000 per annum.
- Removing the ability to catch-up missed super contributions, which will especially affect people who spend some time out of the workforce - like mothers.
- Removing the ability of SMSFs to borrow, which might be sensible overall but certainly limits individual choice.
The reason for pursuing this set of policies is as simple as it is cynical - we are in an environment where less than 50 per cent of the Australian population are net taxpayers, where pandering to interest groups is preferred over looking after the middle ground, and where a neo-Marxist (read university-bred socialist) framework is disseminated both through universities and the media to a financially illiterate public.
Zero-net taxpayers like others to pay tax, and they like the idea that government will provide all manner of services to them. Not exposed to any serious consideration of history, they do not (or choose not to) understand the abject failure and disastrous costs of socialism and communism.
And on top of this, the unions, with which Shorten is intractably aligned, already have effective control of the $630billion invested in industry funds. Now they have their eye on the more than $700billion invested in SMSFs.
The Left despises individual choice, solely because it can't be controlled.
That's why small businesses and independent retirees are targeted. It's a product of Labor that not only confers to the unions (which represent just 14 per cent of the workforce), great influence over the economy, but also passes control of masses of individual wealth. And what does not fall under the control of unions falls to Labor's ally, the Greens. With no plan and even less regard for ordinary people, they want to abolish coal mining.
Attacking small business, self-funded retirees and union-dominated industries in the name of "fairness”; this is the closest you will ever see to socialism. I'd like to sincerely thank those Labor supporters who voted otherwise this time. You saved my livelihood and the jobs of 40 staff.
Look for David's next column in Tuesday's Bulletin.