Treasurer’s franking credit mistakes ring alarm bells

The election of the ALP government last year created a unique linking of political capital and union power creating grand visions superannuation-funded government programs. Picture: NCA NewsWire / Martin Ollman

Around the parliament there is an increasing realisation the Treasurer’s superannuation and franking credit blunders are not just bad Treasury advice.

The industry super funds made a significant contribution to his errors and the smarter people in their ranks now realise that not only has confidence in super been damaged, but there is danger of further damage if the sharemarket and super performance are hit by prolonged higher US interest rates.

Old timers link the recent industry funds’ mistakes to an arrogance like that which contributed to the downfall of the once great AMP society.

Like the industry funds of today, a quarter of a century ago AMP was at the peak of its unrivalled Australian capital power.

It began making mistakes and was completely outmanoeuvred and outperformed by the then-nimble industry funds, led by AustralianSuper.

The election of the ALP government last year created a unique linking of political capital and union power, prompting grand visions of super-funded government programs such as investment in start-ups, manufacturing and social housing.

But for that high-risk strategy to work there must be community confidence in super, which is why the Treasurer’s mistakes, when combined with market jitters, are ringing alarm bells.

Last year the super industry body supported a $5m cap on the amount that could be held in super.

Treasurer Jim Chalmers.

But the funds didn’t work out a policy to accommodate defined benefit funds and, even more seriously, didn’t tell the Treasurer that while the cap was easy to administer in self-managed funds, the industry funds’ systems made it impossible to know both how much people had invested in numerous industry funds and their taxable returns.

The Treasurer, possibly not realising the impossibility of administering any cap, went one step further and established the cap at $3m.

When Jim Chalmers was told the horrible truth he came up with a draconian scheme that taxed unrealised gains and abandoned the capital gains discount. In addition there would be no indexing of the $3m cap.

If it could be administered properly, an indexed $3m cap would not have harmed confidence in super. But these new draconian taxes and no indexation of the $3m set a precedent that if continued would almost certainly undermine community superannuation confidence and jeopardise the “grand plan”.

The more alert industry fund people are scrambling to get the Treasurer out of the hole they helped create.

It’s not easy because the whole super taxing system is a combination of all members and can’t be separated.

The best idea that has been produced is that amounts over $3m are deemed to have a return related to the bond rate, which would mean that in good times the tax would be low but if there are losses there would still be a tax. It’s not ideal but it’s better than the draconian system that been announced.

Then came a Treasury-inspired scheme to hit franking credits as a first step in its long-term desire to remove them completely.

The industry funds should have led the protests on behalf of the Australian community but for some reason held back.

Perhaps it was their involvement in the $3m cap mistake or perhaps it was because they had been major past beneficiaries of one of the Chalmers bans – the blocking of the rort that used franking credits in capital returns.

Yesterday I explained how the Chalmers attack on the use of franking credits in capital returns was long overdue. But the second anti-franking move by the Treasurer will create enormous uncertainty in franking dividends.

The smarter people in industry funds know that this blunder will harm confidence in super across the board but no one is prepared to publicly blast the Treasurer and, as yet, no one has found a way of getting Chalmers out of the hole he and Treasury have created.

Meanwhile, adding to the government’s community super confidence blows, Assistant Treasurer Stephen Jones described members’ funds in super as “honey” that should be used to benefit the government’s “hive”.

Super fund members regard the money as their funds to be used to provide returns for retirement and the thought that their money was actually government money to be used for government wishes is horrific.

We are already seeing a rise in contract and casual labour which avoids compulsory super and enables people to use their the extra funds to reduce their mortgage – a retirement investment that looks much better than the government-endangered super investments.

The government will try to curb the “gig” economy but the confidence reduction started by the Treasurer, which could be fuelled by any sharemarket fall, will not stop.

My message to Chalmers and Co: Remember AMP.

Footnote: Under the Chalmers’ dividend franking disruption bill, which is backdated, the franking of Myer’s special dividend has a cloud over it. If Myer does not make a share issue later in 2023 (there is no exact date), then the franking is safe. But if Myer makes a share issue later in 2023 or maybe beyond, the franking credits will depend on the Australian Taxation Office’s interpretation of the morass of words in the legislation. This is appalling legislation that creates uncertainty.