Dividend franking credits

[Sharkman]

the part where you get 3 dividends this FY is a once off. the part where you have to pay tax on the interim div 12 months earlier than you had to previously will continue year after year until they change it back. unless they meant that they're only doing it for this year? i assumed they intended it (late June payment dates) to be an ongoing policy, as if they put it back to early July next year, it would be an obvious political shot which i would've thought companies try to avoid.

what i meant was:
if the dividend gets paid on July 1 2019, you don't pay tax on it until sometime in Nov 2020, because you can book it in the 2019-2020 FY.
if the dividend gets paid on June 28 2019, you have to pay tax on it in Nov 2019.
so in the former case, you get 12 extra months to make a return on the money that you would have paid out as tax 12 months earlier in the latter scenario.

just to be clear - given that the big bank dividends are fully franked, this will only be an issue for investors on the higher tax brackets, that's what i meant by "it will hurt others".

now i haven't quantified the effect of this, which i kind of implied in my previous post. nor am i particularly keen to work up a hypothetical example since it won't affect me either way (i moved overseas several years ago, may come back one day though). but one thing i've learned over the years is that one should never underestimate the effects of compounding on seemingly small amounts/percentages, it can turn out to be quite surprising.

 

[Skate]

An article from SuperGuide.

As a voter, and as a taxpayer, I am comfortable with most current retired Australians paying no income tax, and for other retirees paying a lower rate of tax than the younger population (and when I refer to younger, I include myself in that category).

Many of our current Australian retirees paid taxes (higher than what we pay today) for up to 50 years (and some still pay tax), and those taxes helped build the infrastructure and community services that we all enjoy today. Hopefully, the efforts of each successive generation will add to the experience and lifestyle of the generations following.

In terms of retirement planning incentives, and budgetary concerns, of course there needs to be a limit to how far tax concessions extend. Such considerations are particularly relevant when a couple or individual chooses to retire earlier than age 65 and 6 months (current Age Pension age), or earlier even than age 60 (although tax-free super benefits generally only kick in from age 60). A retirement lasting 35 to 40 years is an expensive proposition for the retiree, but may also be an expensive proposition for the working taxpayer shouldering an extra tax burden to enable the retiree to enjoy those tax concessions for 35 to 40 years.

In my view, any future limit to tax concessions should not apply to anyone already retired, and should not apply to anyone on the cusp of retirement (say, within 5 years of retirement). Such individuals are unable to mitigate their circumstances, and the ‘pay cut’ in most instances will be not only financially stressful, but also emotionally stressful. As much as possible, I believe we should not change the rules for retired Australians who have limited opportunity to make up the loss of income.

I consider, as do many Australians, that both political parties have betrayed the current batch of retirees. The Liberals introduced a harsher Age Pension assets test to existing retirees, and an immediate limit on super benefits in retirement phase. While the ALP has announced its intention to abolish franking credits refunds; a policy directed largely towards self-funded retirees, and/or Australians running SMSFs (although other Australians are also affected).

Can we blame retirees for expensive housing? As an important aside, yes, housing affordability is a serious issue in this country which we certainly need to address, but blaming retired Australians for this issue seems illogical and mean-spirited. Housing was indeed cheaper when our current batch of retirees bought homes, but the modest houses they mainly bought (even though some may have subsequently upgraded or downsized) are not the houses Australians are expecting to buy today. Rising house prices has everything to do with population growth, limited land availability, and also relatively high expectations for housing size and amenities. Further, the housing issue cannot be separated from the very high standard of living enjoyed by the current younger generations in terms of accommodation, food, technology, entertainment and travel. The younger generations enjoy a standard of living that was not experienced by previous generations in their younger years, and a standard of living that is in place largely as a result of the efforts of previous generations. (I discuss the generational wars and housing supply and demand, at the end of this article.)

Punishing retirees who did what they were told
Over the past decade, the constant theme from both Coalition and ALP governments is how lucky the older generation is in Australia, and how much wealth they hold compared with the younger generation.

I don’t disagree that Australia, compared to many other countries, has a great standard of living for most Australians, although ‘single older women who rent’ is one of the poorest categories of Australians, especially those living solely on the Age Pension.

I am not really sure what policy imposter (a certain think tank comes to mind) started the theory that because older Australians have more money than younger Australians, that in itself is a bad thing. I would hope that an Australian in their sixties or seventies or eighties has accumulated sufficient assets to support a large portion of their retirement, and if they have not accumulated enough savings, then the Age Pension is available to supplement or fully support such an Australian.

Merely cutting retirement incentives is not robust, strategic long-term retirement policy. We want older Australians to have accumulated assets to support their retirement. Suggesting that because they have done what they were expected to do, they should then be punished with retrospective Age Pension and superannuation policies, and selective franking credits policy, is, in my opinion, lazy policy, advised by out-of-touch advisers and egged on by a group of Australians who believe that the younger generations are immediately entitled to a lifestyle that the older generations took 30 to 40 years to create.

If a retired Australian has superannuation savings or non-superannuation savings, and they rely mainly on those savings (super pension, interest, dividends, franking credits) to live, then they did what they were asked to do. Such Australians heeded the key message of successive governments. The key message was you need to save for your retirement rather than relying solely on the Age Pension.

Note that around 70% of Australians over the age of 65 already receive a full or part Age Pension, which confirms the sentiment that our retired population deserves support from the younger working population, just as taxpayers support other Australians too young to work, or physically or mentally unable to work.

Of course, the level of support determined sustainable may change over time, but such changes should be introduced over time, and not apply to current retirees.

Recent governments, and financial industry, largely ignored our older generations
I am dismayed that recent governments have been obsessed with demonising older generations who built this country after two world wars and the Depression. These generations are the ‘Frugal’ generation (sometimes called the Silent generation), Baby Boomers, and to a much lesser extent, Generation X. At the risk of being simplistic, the Frugals were born in the 1920s, 1930s and very early 1940s. Baby Boomers were born from mid-1940s to early 1960s, and Generation X were largely born post-1961 (although some argue post-1963).

Note: Baby Boomers are really two distinct groups – the True Baby Boomers (born from 1946 to around 1955) and the Shadow Baby Boomers (from 1956 to 1961-ish, or 1963-ish). Most Shadow Baby Boomers have not yet retired, while nearly all True Baby Boomers have entered retirement.

I am also dismayed that since the mid-1980s (when productivity super was introduced for many workers) and since 1992 (when Superannuation Guarantee was introduced), and since 2007 (when the super rules were simplified to make the system accessible to everyone, rather than just those who could afford financial advice), subsequent successive governments have otherwise stood still in helping Australians build decent retirement balances. In fact, in the past 10 years, since we launched SuperGuide in 2009, both sides of politics have made saving for retirement more difficult, rather than easier.

The federal government is not solely to blame of course. Australians have had a complacent superannuation industry, more interested it seems in warring between themselves, or protecting the special treatment the super industry (and financial advising industry) receives from successive governments rather than lobby for Australian retirees and super savers. What has the super industry done to empower Australians to create a comfortable and secure retirement?

Here we are, in 2019, dealing with the findings from a Royal Commission into the banking, financial services and superannuation industries, where banks and other financial organisations have dishonestly and incompetently failed to act in the best interests of customers and clients (but that’s another article). Here we are, in 2019, with the industry super fund sector refusing to embrace good corporate governance by opposing mandated independent directors while entertaining the idea of becoming quasi-banks for corporate Australia (but again, that’s another article).

Not long after we launched SuperGuide, and amid the low point of the Global Financial Crisis (early 2009), the ALP government at the time slashed super contributions caps, rather than providing some leeway for older Australians to rebuild their devastated super accounts. The ALP was also deaf to the possibility of allowing older Australians to re-contribute to superannuation accounts post-retirement (to make up for major capital losses and slashing of retirement balances). Concurrently, the ALP was demonising retirees and also Australians who ran self-managed super funds. Sadly, by targeting SMSFs and older Australians, the ALP was targeting the segment of the population that was hardest hit by the Global Financial Crisis (GFC). And those retirees who were hit hardest by the GFC, often suffered in silence and returned to work to supplement devastated savings.

More recently (2017), the Liberal government has hit this same segment of the population with retrospective and harsher Age Pension and superannuation policies. And now in 2019, the ALP promises to abolish franking credits refunds to this same segment of the population, and other affected Australians.

Generational politics and the era of entitlement
Just for the record, I am not a Baby Boomer. I am part of a ‘younger’ generation (but obviously not part of the youngest generations). I am part of the oldest cohort of Generation X, and we now have at least 4 generations that follow Generation X.

Most of my generation entered the workforce in the middle of a recession, unemployment was a major problem (including for Baby Boomers), some of us had a parent/s out of work due to the recession, property was already an affordability issue, the sharemarket had not yet fully recovered from the 1987 crash, interest rates were much higher than they are now, and compulsory super (SG) had not yet been introduced, or was in the process of being introduced. Generation X however missed both world wars, the Korean war, the Vietnam war (although we may have had fathers or uncles who were conscripted to fight), and we enjoyed a relatively stable economic environment (apart from the 1990s recession and the Global Financial Crisis).

The cost of living is definitely higher nowadays due to the much higher standard of living enjoyed and expected by everyone. When I left university and started my first career job, the internet was not in homes, getting take-away coffee every morning was not yet a ‘thing’, and mobile phones were still big bricks and only used by business owners, and some senior executives.

Internet is now ubiquitous in terms of home use and mobile phone use, and when streaming films and TV shows. Everyone seems to want a kitchen straight out of a design magazine, and luxury cars and luxurious homes generally have now become a standard expectation rather than an eventual possibility.

Of course, housing affordability continues to be a major issue for Australians younger than Baby Boomers, but the younger generations are also enjoying a standard of living that is unprecedented, and that previous generations never enjoyed.

We now have youngish commentators, politicians and think tanks espousing weak arguments for why retirees are living it up, and that money should be clawed back in some way. In my view, that is just political bullying of a now-vulnerable segment of the population, reinforced by some of the misleading language used by politicians.

For example, Chris Bowen when referring to the ALP’s proposed ban on franking credits refunds says “Labor is cracking down on a loophole that gives tax refunds to people who have a lot of wealth but don’t pay any income tax”. One, franking credits refunds is not a loophole; it was actively introduced as a policy by the Liberals, on the back of ALP’s introduction of franking credits, and has been considered normal practice for many years. Second, many recipients of the refunds are not wealthy people, although many may own their own home.

Retired Australians are not to blame for the current working generations’ dilemma in saving for retirement, or for housing affordability. Although housing affordability is not the main purpose of this article, I am surprised by how politicians, certain commentators and some younger people are targeting our older citizens. Why are so many people getting worked up about an older couple, or an older individual owning their own home (after, say, 50-plus years), and who have saved all of their lives so they can try to have financial independence (or part independence) in their later years. We should thank them, and congratulate them.

Every generation has experienced advantages and disadvantages, and I do not believe the federal government should be blaming our retirees for events outside of their control (and then taking from our retirees by implementing harsher Age Pension assets test, caps on retirement balances, lower caps on super contributions, potential removal of franking credits refunds) when those retirees cannot mitigate their circumstances.

Why the GFC is still hurting our retirees
In my view, the Global Financial Crisis hit Baby Boomers and the ‘Frugal’ generation the hardest, and many are still trying to recover financially, 11 to 12 years later.

Millions of words have been written about the Global Financial Crisis, but very few practical words have been devoted to the plight of retirees, plus those Australians who were on the cusp of retirement when the GFC hit, and those Australians who were planning ahead for their retirement.

At the time of the GFC, many self-funded retirees lost up to half of their accumulated wealth invested via the sharemarket, while a significant number had assets frozen in mortgage funds. Even the safe haven of cash was (and still is) paying interest at a rate that is not much more than the inflation rate. The opportunity for accumulating real wealth was clearly looking grim 11 to 12 years ago.

Although investment markets have improved considerably since then, federal government superannuation and Age Pension policies have savaged most of the benefits salvaged from a market recovery.

Obviously, investing is for the long term and eventually markets do recover, but during the GFC, some retirees were forced to sell assets to live because they no longer had a working income, which meant rebuilding an asset base for retirement became problematic.

If you are a long-term shareholder, then you would be aware that the market has not truly recovered since the GFC. For example, the high point of the S&P/ASX200 was October 2017 (6754.1), and the low-point during the GFC was February 2009 (3344.5) – halved! Eleven years from the October 2017 highs, the S&P/ASX200 sat at 5830.30 (October 2018) – still nowhere near the pre-GFC highs. At the time of writing, the S&P/ASX200 sits at 6175 (17 March 2019), still well below its high from 11.5 years ago. The All Ordinaries index follows a nearly identical trend.

Important: The S&P/ASX200 and the All Ordinaries index has tread water for a long time, which is another reason why dividends, and franked dividends have become so important for retired Australians.

A major problem for non-working retirees then, and now, is that once the money has gone from super, you can’t get the money back into super. And there are those retirees who have never had the opportunity to take advantage of super. If you’re a woman in your sixties, seventies or eighties, you may not even had the opportunity to join a super fund.

The forgotten retirees in this ‘political bullying’ election strategy are those who were too old to fully take advantage of the tax-free super rules introduced from July 2007, and then had dramatically reduced personal share portfolios due to the sharemarket downturn, and are now grappling with harsher Age Pension rules, caps on superannuation retirement balances and the threat of the removal of franking credits refunds.

Australia’s retirees are the backbone of Australia’s sharemarket, and an important source of capital for companies, and savings for banks. Retirees control a significant chunk of the top 200 ASX companies, and are major contributors to the relative stability of our financial markets. For example, Australians running their own self-managed super funds control about 10% of the Australian sharemarket. Many retirees rely on company dividends for income, and franking credits for tax management.

Regardless of which party wins the 2019 Federal Election, please leave retirees alone. I believe that any new policies introduced, should not detrimentally affect the income of Australians who have retired, or who are within 5 years from retirement.

Skate.

 

[Ann]

Companies helping shareholders to get franking credits

While the furious debate around dividend franking credit refunds is continuing, companies are carefully and quietly ensuring that their shareholders are protected as much as possible from the planned change.

Westpac (ASX: WBC) is the latest company to effectively help shareholders to get the maximum bang for their buck out of franking credits by engineering three dividend payments in this financial year.


While Westpac didn’t give any reasons for its decision to bring forward its interim dividend payment date by nine days to June 24, it is fairly clear that Labor’s plans to stop paying franking credit refunds to self-funded retirees is behind the move. More...

 

[Izabarack2]

I am a self-funded retiree. I have an Allocated Account pension on which no tax is paid and also have a small Commonwealth pension that is taxable income. Labor's misrepresented tax policy above will not negatively affect me. My understand of the policy is to stop allowing franking credits flowing to retirees who do not report a taxable income each year. It is also pretty easy to create a small taxable income for those who have bundled everything up into a SMSF, so I do not understand all the angst if there are easy workarounds to be had.

 

[Zaxon]

My understand of the policy is to stop allowing franking credits flowing to retirees who do not report a taxable income each year.

Not quite. The policy is to tax all dividends at a minimum of 30%. So if you earn less than $37,000 , you'll be paying more tax. Plus if all your income is from dividends, there's essentially no tax free threshold, since all your money is taxed at 30% from the first dollar.

 

[Bill M]

I am a self-funded retiree. I have an Allocated Account pension on which no tax is paid and also have a small Commonwealth pension that is taxable income. Labor's misrepresented tax policy above will not negatively affect me. My understand of the policy is to stop allowing franking credits flowing to retirees who do not report a taxable income each year. It is also pretty easy to create a small taxable income for those who have bundled everything up into a SMSF, so I do not understand all the angst if there are easy workarounds to be had.

It affects me. I have a small portfolio of dividend income producing shares outside of super. I am a self funded retiree and as I earn well under 37K a year. I currently get a portion of franking credits rebated to me from the ATO. This is not free money, this is tax paid money already. Bill Shortens short sighted view and cash grab from retirees means that I will no longer receive those franking rebates. To me it means a loss of $3,000 worth of rebates. Why on earth would anyone in their right mind vote for a pay drop of that magnitude?

And to complicate the matter further, if the man standing next to me has the same portfolio but draws a government pension of say $10 a week he doesn't lose his rebates. Do you think that is fair? I certainly don't and I will NOT BE VOTING LABOR!

 

[PZ99]

It affects me. I have a small portfolio of dividend income producing shares outside of super. I am a self funded retiree and as I earn well under 37K a year. I currently get a portion of franking credits rebated to me from the ATO. This is not free money, this is tax paid money already. Bill Shortens short sighted view and cash grab from retirees means that I will no longer receive those franking rebates. To me it means a loss of $3,000 worth of rebates. Why on earth would anyone in their right mind vote for a pay drop of that magnitude?

And to complicate the matter further, if the man standing next to me has the same portfolio but draws a government pension of say $10 a week he doesn't lose his rebates. Do you think that is fair? I certainly don't and I will NOT BE VOTING LABOR!

I wouldn't vote for them either in your case. An 8% cut to your income is a hard axe to bear.

I feel the same way about the Coalition and IR laws so I know where you're coming from.

I think ScoMo should get up and pledge to reinstate the credits whenever they return to Govt.

 

[HelloU]

adding facts to avoid confusion ...

Wages are determined by the The Fair Work Commission. They are appointed by the Governor General. This system was basically established by the Rudd Government in 2009 to make the wage setting process independent of government.

Shorten has said that he will ignore decisions that are made by the commission, and overturn decisions if he does not agree with what the FWC process determines.

Seems pointless to have a commission if that is the case.

 

[PZ99]

adding facts to avoid confusion ...

Wages are determined by the The Fair Work Commission. They are appointed by the Governor General. This system was basically established by the Rudd Government in 2009 to make the wage setting process independent of government.

Shorten has said that he will ignore decisions that are made by the commission, and overturn decisions if he does not agree with what the FWC process determines.

Seems pointless to have a commission if that is the case.

I fail to see what this has to do with franking credits but... Shorten is seeking a mandate to restore penalty rates. If the people don't agree with the FWC they will vote accordingly.

There's no confusion... Bill M doesn't want to lose his credits so he won't be voting Labor.
People who want / need their penalty rates restored probably will vote Labor.

People who want to go broke will probably vote for Greens / Clive Palmer or Fraser Anning

 

[Junior]

I fail to see what this has to do with franking credits but... Shorten is seeking a mandate to restore penalty rates. If the people don't agree with the FWC they will vote accordingly.

There's no confusion... Bill M doesn't want to lose his credits so he won't be voting Labor.
People who want / need their penalty rates restored probably will vote Labor.

People who want to go broke will probably vote for Greens / Clive Palmer or Fraser Anning

The divide is becoming clearer with each policy announcement:
* If you earn more than $100k a year (or aspire to in future) - vote Liberal
* If you are a self funded retiree - vote Liberal
* If you are a low income earner (excl. retirees with direct shares) - vote Labor
* If you participate in a unionised industry, and earn <$100k - vote Labor

 

[HelloU]

glad to help clear things up on how IR works in Australia when other posters mention IR in their writings

If the communal thought is to throw out the decisions of the independent process then the next step would just be the government of the day making arbitrary decisions on who should get a pay rise ....... Hey Charger, hey Sandman, hey ....what was the name of the Ford offering?

and all of a sudden, without any details to scrutinize, certain sector workers will get promised a 20% wage rise whilst other workers on the same pay levels, are not being offered any pay rise at all. Why do these other similarly paid workers not deserve a pay rise as well?

 

[PZ99]

Easy. Because those similarly paid workers didn't have their pay cut in the first place.

But when I said IR - I wasn't talking about penalty rates.

There's other IR laws I have issues with which I'm happy to discuss in the relevant thread

As for Govt of the day making arbitrary decisions - penalty rates should be decided by state Govts - not FWC or any other federal body - it's not practical to overlay one set of shift loadings in a country as diverse as Australia.

 

[HelloU]

(ummmmm .......child care sector workers .......... they are being promised the post election wage rise ....... but similar paid workers are not being offered a wage rise ...... and not being told why they do not deserve one)

 

[PZ99]

(ummmmm .......child care sector workers .......... they are being promised the wage rise ....... but similar paid workers are not being offered a wage rise ...... and not being told why they do not deserve one)

Happy to debate that one with you mate. But not in this thread.

It has zip to do with the topic.

 

[HelloU]

correct, labor, if elected, has promised substantial wage rises to the child care sector (outside of the Fair Work and similar Industrial Relations processes) but will not give wage rises to others workers.

Labor will not say why the pay rise is deserved over similar paid workers who will NOT be offered the same rise ........ Labor seems to be walking away from the independent wage system in Australia that was set up in 2006 by the Labor Party ...... but Labor are not offering an alternate system ....they are saying that they will ignore the Commission decisions when that decision does not suit them.

Are franking credits from retirees going to be used to pay for these wage rises?

 

[PZ99]

20% wage rise? Make it 40%

 

[HelloU]

oh, if we are having a joke about taking wage rises arbitrary outside the standing state and federal systems (without any explanation or discussion) then lets just make it 800%.

Why are labor NOT offering minimum wage earners the same wage rise they are promising child care workers? Minimum wage earners are being offered nothing.

 

[PZ99]

20% over 8 years = around 2.3% a year compounded + their regular payrise.

Phhhhhhttt > Make it 900%

 

[HelloU]

Correct, minimum wage earners are being offered nothing by labor. I expect they would love to be offered that pay rise though (make up for loosing conditions when shorten did the spotless deal).

I reckon the lowest paid should get first bite at a pay rise .... but I must think differently to some.

 

[PZ99]

Sounds good mate. I like your proposal. Wanna put it in writing?

Yes, you are thinking differently to some.

You're thinking about payrises and the FWC - I'm thinking about franking credits...