New ALP policy announced

Recently the Opposition Leader (Hon Bill Shorten MP) and the Shadow Treasurer (Hon Chris Bowen MP) announced that a future ALP government will no longer permit cash refunds of imputation credits.  Currently Labour is odds on to win the next Federal election, so ALP policy needs to be taken seriously.  Within a few weeks however, Labour had to change their policy.  They realised that the measures they proposed would adversely impact several hundred thousand pensioner voters in Labour heartland.  So they adjusted their plan to exclude any impact on welfare recipients including full or part age pensioners.

But even after this amendment, the policy is still ill-conceived.  The carve-outs for part pensioners are inequitable.  Those who are just entitled to some pension benefit enormously from the exemption compared to those who narrowly miss out.  Noel Whittaker’s article “Foolish to exempt pensioners from Labour’s Dividend Tax Policy” (Sun-Herald, 1 April) makes this point.

Apart from anything else, the new policy just won’t work.  Self-funded retirees can avoid the negative impacts that the announced policy is intended to bring about.  The change will not produce more than a fraction of the $59 billion in tax savings claimed.  Why?  Because behavioural changes will largely defeat the new policy.

Let’s bypass some of the possible responses (such as selling down Australian shares to purchase other assets).  Let’s go straight to the big one which has the potential to kill the tax “savings”.

How to get around the new measure

Take my own case for example.  My SMSF attracts imputation credits of between $20K and $25K each year, let’s call it $25K.  To keep things simple let’s assume that my SMSF is entirely in pension phase.  So am I going to lose $100K in the first four financial years after the policy is implemented?

Mr Shorten and Mr Bowen, if you are reading this, I have a message for you to pass on to the Parliamentary Budget Office (PBO).  (The PBO costed the “savings” claimed in the ALP announcement).  If the PBO thinks the ATO will now get $100K of my money as part of the $59 billion in purported savings over a 4-year period, “tell ’em they’re dreaming”.

All I need to do is to sell the Australian shares in my SMSF and roll over the proceeds to Australian Super.  (Or any of the 21% of not-for-profit funds that offer direct investment, or 42% of retail funds – but check the fees).  Using Australian Super’s Member Direct Option, I can reinvest in exactly the same ASX300 shares that I owned previously.  Effectively all I need to do is transfer my Australian shares into a different fund which does pay tax and which can fully utilise the imputation credits.  Australian Super will pass the benefits of those credits to me as the pensioner member who generated them.  Hello again, my $100K!  Bye bye, Mr Shorten and Mr Bowen, to your $59 billion of “savings”.

Some issues

It is true that there are some potential issues relating to the rearrangement of people’s affairs to recover their imputation credits.  An SMSF that is still partly or wholly in accumulation mode should take care as to which shares are sold.  If it disposes of shares carrying large capital gains, the fund will pay some capital gains tax.  So the optimal strategy may be to roll over only part of the fund’s Australian equity holdings.

Also, expenses may be an issue.  Ideally you don’t want to have accounts in multiple funds.  Australian Super charges $395 to set up a “Member Direct” portfolio as well as administration fees of up to $750 for large accounts.  But the really big fish don’t care about a few bucks in additional costs.  That is nothing to them compared to their tens of thousands, or hundreds of thousands, of imputation credits that they receive every year.  The people who might struggle with this ALP policy are those SMSF pensioners with assets just above the pension cut-off threshold who do not have the benefit of financial advice, who are not themselves financially savvy enough to figure out how to deal with the change.  Put another way, Mr Shorten and Mr Bowen, your measures won’t catch most of the sharks with the mega-SMSFs that you are targeting: the sharks are laughing at you right now.

The real winners from the ALP policy will be industry funds and financial advisers.  The losers will be the SMSF industry, those who aren’t well advised or well informed and those who cannot easily shift their assets into an industry or retail fund.

For a whole raft of reasons, Mr Shorten and Mr Bowen, your proposed measures are poorly conceived but here is the biggest reason of all: they WON’T WORK.