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This article is from the April 8 issue of The Age Digital Edition. To subscribe, visit https://theage.digitaleditions.com.au/.
Noel Whittaker
LABOR'S CHANGES A TAX ON WIDOWS
Labor’s latest attack on franked dividends is not a tax on the wealthy, it is a tax on widows.
Let me show you step-by-step . The imputation system, which avoids dividend income being taxed twice, will stay in place. What Labor proposes is to abolish the refund of excess franking credits. The only way you can have an excess franking credit is to have a low income. Therefore, the only possible targets are low-income earners, and superannuation funds, where the tax rate varies between zero and 15 per cent.
But there will be no tax to be collected from large retail funds and industry funds, as they can spread the imputation credits over all their members: nothing for Labor here.
And they have promised to exempt all age pensioners: nothing for Labor there either.
So let’s think about who is left, on a case-by-case basis.
Self-managed super funds in pension mode with two members holding a total balance of less than $3.2 million
They can be seen as the prime target, because clearly all their excess franking credits will be lost under Labor’s proposal. But that is simply solved.
One option is to close the SMSF and roll the balance to a large retail or industry fund as mentioned above. The other option is to cash in their entire holding of Australian shares, which can be done tax-free , and roll over the cash now freed up to a second superannuation account with one of the big funds, choosing Australian shares as their preferred asset class.
With this strategy, there is still nothing for Labor: the SMSF trustees can make any investments they choose – avoiding Australian shares – in their self-managed fund, and the pooled fund will invest in Australian shares for them, while optimising their mix for the current tax situation.
Self-managed superannuation funds with large balances
This could appear to be an easy target, but the Liberals got there first . Think about a portfolio of $10 million, which has a fairly standard asset allocation of cash at 20 per cent, Australian shares at 35 per cent, international shares at 25 per cent and property at 20 per cent. The annual income would be $390,000, including franked dividends of $140,000, on which franking credits are $48,000. When you gross up the income for the franking credits, the taxable income of the fund becomes $438,000.
Before the Liberals changed the system in July, the franking credits of $48,000 would have been refunded. But because the fund is 70 per cent in accumulation now, the tax payable by the fund becomes $46,000. Imputation credits pay all this, leaving just $2000 for Labor. I’m sorry Bill, but Malcolm beat you to it.
Older, wealthy, self-funded retirees
Their situation should remain unchanged. Let’s say their main asset is a portfolio of $4 million of Australian shares in joint names paying franked dividends of $90,000 a year to each person plus franking credits of $38,571.
The tax on that will be about $38,000, including the Medicare levy, which means they may lose possibly $600 in franking credits, small bikkies in the scheme of things.
So who is left over to pay the tax? We have raised almost no extra tax so far.
Widows and widowers
Let’s return to our good friends the Browns, who you met in last week’s column. They owned their own home, had $75,000 in bank deposits, and also held a share portfolio worth $710,000 returning dividends of $32,000 plus franking credits of $13,700.
Their pension was $19 a fortnight combined, so total income – including franking credits and interest – was $47,700 a year.
Unfortunately, Mr Brown died suddenly last week, leaving all his assets to his wife. Her situation will change dramatically.
She is now a single pensioner, and the assets she has inherited take her over the Centrelink cutoff point. She will lose her pension, as well as the concession card that goes with it.
The good news is that she will keep the franked dividends of $32,000. The bad news is that, under Labor’s proposal, she will lose the franking credits of $13,700. Labor’s proposed measures have finally raised some money.
Hopefully anybody potentially in this situation will have taken good estate planning advice to ensure a more effective distribution of assets when one party dies, so the survivor can retain a part pension and all the franking credits.
So how could Labor have made such a massive mistake? First, it was done in haste. Remember it was announced just a few days before the Batman byelection.
Second, it is obvious that the costings were based on the situation before the June 30 changes, when the tax-free component of super was limited to $1.6 million.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au
Noel Whittaker
LABOR'S CHANGES A TAX ON WIDOWS
Labor’s latest attack on franked dividends is not a tax on the wealthy, it is a tax on widows.
Let me show you step-by-step . The imputation system, which avoids dividend income being taxed twice, will stay in place. What Labor proposes is to abolish the refund of excess franking credits. The only way you can have an excess franking credit is to have a low income. Therefore, the only possible targets are low-income earners, and superannuation funds, where the tax rate varies between zero and 15 per cent.
But there will be no tax to be collected from large retail funds and industry funds, as they can spread the imputation credits over all their members: nothing for Labor here.
And they have promised to exempt all age pensioners: nothing for Labor there either.
So let’s think about who is left, on a case-by-case basis.
Self-managed super funds in pension mode with two members holding a total balance of less than $3.2 million
They can be seen as the prime target, because clearly all their excess franking credits will be lost under Labor’s proposal. But that is simply solved.
One option is to close the SMSF and roll the balance to a large retail or industry fund as mentioned above. The other option is to cash in their entire holding of Australian shares, which can be done tax-free , and roll over the cash now freed up to a second superannuation account with one of the big funds, choosing Australian shares as their preferred asset class.
With this strategy, there is still nothing for Labor: the SMSF trustees can make any investments they choose – avoiding Australian shares – in their self-managed fund, and the pooled fund will invest in Australian shares for them, while optimising their mix for the current tax situation.
Self-managed superannuation funds with large balances
This could appear to be an easy target, but the Liberals got there first . Think about a portfolio of $10 million, which has a fairly standard asset allocation of cash at 20 per cent, Australian shares at 35 per cent, international shares at 25 per cent and property at 20 per cent. The annual income would be $390,000, including franked dividends of $140,000, on which franking credits are $48,000. When you gross up the income for the franking credits, the taxable income of the fund becomes $438,000.
Before the Liberals changed the system in July, the franking credits of $48,000 would have been refunded. But because the fund is 70 per cent in accumulation now, the tax payable by the fund becomes $46,000. Imputation credits pay all this, leaving just $2000 for Labor. I’m sorry Bill, but Malcolm beat you to it.
Older, wealthy, self-funded retirees
Their situation should remain unchanged. Let’s say their main asset is a portfolio of $4 million of Australian shares in joint names paying franked dividends of $90,000 a year to each person plus franking credits of $38,571.
The tax on that will be about $38,000, including the Medicare levy, which means they may lose possibly $600 in franking credits, small bikkies in the scheme of things.
So who is left over to pay the tax? We have raised almost no extra tax so far.
Widows and widowers
Let’s return to our good friends the Browns, who you met in last week’s column. They owned their own home, had $75,000 in bank deposits, and also held a share portfolio worth $710,000 returning dividends of $32,000 plus franking credits of $13,700.
Their pension was $19 a fortnight combined, so total income – including franking credits and interest – was $47,700 a year.
Unfortunately, Mr Brown died suddenly last week, leaving all his assets to his wife. Her situation will change dramatically.
She is now a single pensioner, and the assets she has inherited take her over the Centrelink cutoff point. She will lose her pension, as well as the concession card that goes with it.
The good news is that she will keep the franked dividends of $32,000. The bad news is that, under Labor’s proposal, she will lose the franking credits of $13,700. Labor’s proposed measures have finally raised some money.
Hopefully anybody potentially in this situation will have taken good estate planning advice to ensure a more effective distribution of assets when one party dies, so the survivor can retain a part pension and all the franking credits.
So how could Labor have made such a massive mistake? First, it was done in haste. Remember it was announced just a few days before the Batman byelection.
Second, it is obvious that the costings were based on the situation before the June 30 changes, when the tax-free component of super was limited to $1.6 million.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au
