Call for Labor to consider other franking solutions

By Joanna Mather

Shareholders have urged Bill Shorten to consider alternatives to his franking credit policy, including a $3.2 million limit on how much money can be stashed in the tax-advantaged superannuation environment.

Should it win the next election, Labor will make franking credits nonrefundable, leaving an estimated 900,000 self-funded retirees worse off. Labor wants to target the rich but opponents argue it will hit middle Australia hardest.

Financial services consultancy firm Rice Warner has suggested three alternative mechanisms for collecting tax from those with large imputation credit refunds.

Among them is the idea of a $3.2million limit on how much money can be held in super. This option would hurt people who managed to accumulate very large balances – as much as $100 million in some cases – before the introduction of the $1.6 million ‘‘total superannuation balance’’ cap.

Under new laws introduced by the Coalition, any amounts over $1.6 million have had to be transferred out of tax-free pension accounts into accumulation accounts. Even so, accumulation assets are taxed very lightly – 15 per cent compared with the top marginal rate of 45 per cent.

Forcing people to remove this money from super would limit the volume of franking credit refunds flowing to big self-managed super funds while producing a revenue windfall for the government.

In its submission to a parliamentary inquiry examining Labor’s policy, Rice Warner said super savers could be forced to transfer ‘‘excessive’’ amounts of money out of super when they reached a certain age, say 65.

‘‘We suggest a threshold of (say) $3.2 million for all accumulation and pension accounts combined. Amounts above this would be transferred taxfree out of the low-tax superannuation environment.’’

The logic is that $3.2 million is two times the $1.6 million total superannuation balance limit that will crimp the ability to build big balances in the future.

The other options put forward by Rice Warner are taxing all earnings on super, including money in pension accounts which are tax free at present,at 12 per cent, or capping franking credit refunds at $5000 per taxpayer.

Australian Shareholders Association policy manager Fiona Balzer said all three options should be considered because Labor’s policy appeared to lack any underpinning objective other than to increase revenue.

‘‘If the view is that some taxpayers shouldn’t be in the zero tax bracket, with SMSFs in pension phase a particular target, the policy response should be to propose a change to their tax rate, being explicit about who is being taxed and why,’’ she said.

‘‘What is currently proposed would see people of similar means being treated differently, which breaches principles of fairness.’’

Self-managed Independent Superannuation Funds Association managing director Michael Lorimer said really large funds would disappear from the system over the next 20 to 30 years and contribution caps that came into force on July 1, 2017, would mostly prevent their recurrence.

Association of Independent Retirees acting president Wayne Strandquist said taxing super in the pension phase was a bad idea, but a refund cap of $6000 to $8000 would ‘‘ensure that lower-income retirees are not impacted but still collect a substantial proportion of the target revenue’’.

Alliance for a Fairer Retirement spokeswoman, Deborah Ralston, said the group would contemplate debating changes to the policy only if Labor was elected and sought to legislate the proposal. ‘‘We believe the proposal unfairly targets self-funded retirees and SMSFs,’’ she said. 

‘‘The alliance is strongly of the belief that any reforms targeting superannuation should be far more holistic and certainly not target a specific class of taxpayers.’’

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