Franking credit scheme underlines ALP’s lack of business acumen

Labor is in danger of making a fundamental mistake on its franking credit calculations.

Chris Bowen, left, and Bill Shorten takes questions during a Parliament House press conference. Picture: Gary Ramage

Chris Bowen and Bill Shorten are in danger of making a fundamental mistake on their franking credit calculations. They will not raise anything like the money they expect from superannuation and what will be raised will come more from the battlers than the rich.

It’s a mistake that underlines the fact that the ALP is dominated by former union officials who are not in close touch with what happens in the investment and business worlds.

This is how the mistake was made. Bowen correctly analysed the Australian Taxation Office figures that showed many people had large sums in pension-mode superannuation and were receiving very large tax refunds from franking credits. Almost all of these funds were invested via self-managed funds rather than industry and retail funds.

So these self-managed fund investors became the linchpin of the ALP attack on the basis that they should not receive millions of dollars in franking credits.

But Scott Morrison in last year’s budget isolated those same people and attacked them via a $1.6 million cap on the amount of assets that those in pension mode could invest tax free. That cap means those people with large superannuation pension-mode sums, say $5m and above, now pay a 15 per cent tax on the revenue from the assets in their fund above $1.6m.

The measures came into operation on July 1 last year and apply for the current financial year. That means there are no statistics to work on. But talking with those closely connected to the large pension-mode funds say that a significant portion of the old franking credits that Shorten isolated in his speech have been transferred to the government via the 15 per cent tax on income from assets above $1.6m.

While the 15 per cent tax does not cover all the benefits of franking credits, it takes out a big slice and most large funds have investment income and capital gains that are not franked and provide a further tax offset.

Accordingly, the Bowen-Shorten measures annoy the rich but are not a big issue. But for the battlers, it is a disaster because they use the franking credits to help pay day-to-day living expenses at a time when interest rates are low. When Costello set up the current superannuation structure he could never have envisaged franking credits would enable thousands who saved for their retirement to live at a reasonable standard at a time of low interest rates.

Given low bank deposit returns, the franking credits have saved the battlers. And its those franking credits that the ALP will take away on the false assumption that the rich are being attacked. It’s ironic that the Coalition superannuation changes protected the battlers but attacked the rich, their traditional supporters. The ALP is leaving the rich virtually unscathed but are attacking the battlers, including many retired unionists.

When the ALP realises its own people are the victims and the money that will be raised is much less than expected there will be great pressure to reverse the measures.