Originally published by Cuffelinks
“We will not allow the Government to lecture us when they argue that tax loopholes for the wealthy are actually a secret socialist mechanism to redistribute income to the least well off in this country.
I believe that Australians actually want a better tax system. They want a tax system which doesn’t subsidise the high-priced medico on $500,000 being able to split income and pay less tax than the nurse on $50,000 a year.
Australians do not want to see a tax system which finances the lucky few who own big pools of shares. And then not only do they get the dividends from the shares, the income from the shares, and pay no tax – they shouldn’t in this case be allowed to get a 30% loading for owning shares in this country and pay no income tax. It is not sustainable.”
Bill Shorten’s Address to the Victorian Labor Conference, Melbourne, 27 May 2018
The next federal election will be fought on tax. That’s good news as reform is overdue. While politicians have been fiddling with our tax system for years, there has been no meaningful tax reform since John Howard introduced the GST 18 years ago.
But any debate on tax must be based on facts not rhetoric. Unfortunately, that’s a hard thing to achieve, and many of the contributions to the debate right now are unhelpful. It appears to me that Labor, in particular, wants to divide Australians into villains and victims.
I asked a senior tax partner how Opposition Leader Bill Shorten’s statement above, that a “high-priced medico on $500,000” could pay less tax than a nurse on $50,000, could be correct. He said it would not be possible except in a very specific case of a doctor with many children aged 18 and over with no income plus a string of loss-making investments. Last week, the Deputy Opposition Leader Tanya Plibersek vowed to make sure “the rich pay their fair share of tax”.
‘Rich’ taxpayers already paying more than a ‘fair share’
The words ‘rich’ and ‘fair share’ are highly subjective, so let’s look at some facts. A person earning $40,000 a year pays $5,347 a year tax including Medicare levy, or 13.4% of their taxable income. A person earning $95,000 a year pays $24,682 tax, or 26% of their taxable income. A person on $400,000 a year pays a whopping $161,232 in tax. That’s 40.3% of their taxable income.
According to the latest ATO statistics, just 2.9% of taxpayers earn more than $180,000 a year, and they contributed 29.8% of the total income tax collected. There were 16.6% in the second-lowest tax bracket and they contributed 39% of total income tax. So 19.5% of taxpayers are contributing almost 70% of our total income tax.
I would say that those top-bracket earners are punching way above their weight.
What about women as victims of the tax system?
I have been a strong defender of women’s rights long before the topic became fashionable and I am across the points that are regularly made in the media. On average women retire with much less superannuation than men, and their pay is much less than men. But working women tell me one of their biggest challenges is childcare, which can cost over $100 a day per child. Consequently, many women are choosing to structure their employment to maximise the opportunities to care for their family at the expense of a higher income. And leaving the workforce to have children and raise children can have a big impact on their final superannuation balance. These issues will not be affected by tax policy. To make changes here, other policies would be required.
But facts don’t get in the way of spin. Recently on ‘The Drum’, Ben Oquist of The Australia Institute argued that “negative gearing discriminates against women”. His rationale was that the majority of investors who use negative gearing are men. Most investors in residential property are couples, and for tax deduction purposes the asset is normally put in the name of the higher income earner, who is often the bloke.
And what is Labor’s solution to solve the situational problems many women face? It is to take the GST off tampons, since the tax discriminates against women, as these products are an essential item for many of them. Well, Bill, I have news for you – there is GST on toilet paper and we all need that. It’s a very slippery slope. In any event, if we can believe my local pharmacist, removal of the GST would save the average woman just $18 a year, or a couple of hours of childcare.
Another issue in the coming election campaign will be catch-up concessional superannuation contributions. They were introduced by the Coalition from July 2017 to enable people who have been absent from the workforce – usually women caring for young children – to make extra contributions when they re-join the workforce to help them catch up on their super. It’s sensible and workable. Yet Labor, who claim to champion women, is opposing it. Work that out.
Who really loses from Labor’s new franking policy?
Labor’s latest attack on franked dividends is not a tax on the wealthy: it is a tax on widows.
Let me show you this step by step. The imputation system, which avoids dividend income being taxed twice, will stay in place. Labor proposes to abolish the refund of excess franking credits. There will be no tax collected from large retail funds and industry funds, as they can spread the imputation credits over all their members. And Labor has promised to exempt ‘pensioners’, so no revenue there either.
So let’s think about who is left, on a case-by-case basis.
A) SMSFs in pension mode with two members holding a total balance of less than $3.2 million
They could be seen as the prime target, because 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 fund. Another 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 retail funds, choosing Australian shares as their preferred asset class. The SMSF trustees can make any investments they choose – avoiding Australian shares – in their SMSF, optimising their mix for the current tax situation.
B) SMSFs with large balances
This would appear to be an easy target, but the Coalition got there first. Think about a portfolio of $10 million, which has a fairly standard asset allocation of cash 20%, Australian shares 35%, international shares 25% and property 20%. Let’s say the annual income is $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 last July, the franking credits of $48,000 would have been refunded. But because the fund is 70% in accumulation now, the tax payable by the fund becomes $46,000. Imputation credits pay all this, leaving just $2,000 for revenue under Labor’s policy. I’m sorry Bill, but Malcolm beat you to it.
C) Older, wealthy, self-funded retirees
Their situation should remain unchanged. Let’s say their main asset is a portfolio of $4 million 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 around $38,000 including the Medicare levy, which means they may lose possibly $600 in franking credits. Small bikkies.
So who is left over to pay the tax? We have raised almost no extra tax so far.
Impact on widows and widowers
Think about a married couple who own their own home, have $75,000 in bank deposits and a share portfolio worth $710,000 returning dividends of $32,000 plus franking credits of $13,700. Their age pension is $19 a fortnight combined, so total income – including franking credits and interest – is $47,700 a year.
Let’s say the man dies suddenly, leaving all his assets to his wife. Her situation will change dramatically. The assets she has inherited take her over the Centrelink cut-off 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 but 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 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.
Noel Whittaker is the author of numerous books on personal finance.