25,000 reasons to stop Labor's changes to dividend imputation

Today, I spoke at the Fairer Retirement Summit discussing Labor's proposed changes to the dividend imputation system. You can listen to a recording and read the transcript of my speech below.

Thank you all for giving me this opportunity to discuss a very real threat to the livelihood of hundreds of thousands of Australians. I would like to thank Deborah Ralston and everyone involved in The Alliance for a Fairer Retirement System for all of their work on this issue.

In markets and in politics, retail investors are often overlooked, and their voices are rarely heard. At Wilson Asset Management, we are responsible for the financial assets of almost 80,000 retail investors. We are also passionate about giving them a voice and fighting on their behalf.

Bill Shorten’s claim that Labor’s policy will only impact wealthy self-managed superannuation funds is a lie.

Throughout our campaign we have heard thousands of individual stories about how Labor’s planned changes to the dividend imputation system will devastate people’s lives.

Before I share some of those stories with you, I would like to talk about the benefits of the current dividend imputation system and highlight why it should be protected.

Dividend imputation was established in 1987 by the Hawke Government to eliminate double taxation of company profits at the corporate and shareholder level. In 2001, the Howard Government improved the system by ensuring that individuals who were subject to a tax rate below the 30% company tax rate were compensated for the tax they had paid at the higher rate. Labor leadership at the time claimed it was also part of their policy.

The current system is fair and equitable and it encourages the effective allocation of capital and efficient distribution of profits. We believe it enables:

• robust capital formation in Australia;
• efficient capital distribution; and
• a more stable economy with reduced cyclicality.

Dividend imputation leads to efficient capital allocation by directing capital towards Australian companies. Dividend imputation encourages Australian companies to invest in Australian projects as franking credits are not earnt on foreign income. Increased local investment is a boon for Australian workers, the Australian Tax Office and Australian shareholders.

Academic literature has shown that companies with high dividend payout ratios outperform those with lower payout ratios. Research undertaken by academics Arnott and Asness found companies with higher payout ratios generated the best earnings growth over a 130-year sample period. Dividend imputation incentivises Australian companies to distribute a significant portion of their tax-paid earnings. A review of company data between 1995 and 2009 found firms distributing franking credits had a higher dividend payout ratio than non-franking credit firms.

In lowering the costs of equity relative to debt, dividend imputation limits the imperative for companies to gear. As a result, Australian companies have  relatively low levels of gearing compared to other countries. Goldman Sachs Investment Research found that Australia has the lowest level of gearing when adjusted for its sector mix. Leverage exacerbates the cyclicality of financial markets as it drives companies’ performance during bull markets and exaggerates companies’ losses during financial downturns. Leverage was a key factor in the magnitude of the global financial crisis. As a result, the capital discipline that dividend imputation has driven in Australia has provided a crucial defence against extreme cyclicality and debt-related systemic risk.

We believe dividend imputation has significantly benefitted Australia’s financial system and contributed to the fact that Australia has not experienced a recession in 26 years. The removal or adjustment of dividend imputation would be enormously detrimental to the Australian financial system.

The economic case for protecting Australia’s current dividend imputation system is clear. What concerns me most is the impact to the household budgets of financially vulnerable Australians. We have received more than 25,000 signatures on our petition to stop Labor’s changes. Our poll of signatories found:

• approximately 70% earn $90,000 or less per annum;
• each year, almost 85% would lose up to $30,000 year and nearly 15% would lose more than $30,000.
• more than half would be forced to reduce their family's living standard and quality of life;
• almost a third plan to spend their financial assets to receive the Age Pension.

We have also received almost 2,000 individual stories about how people will be impacted by these changes. Let me share three stories with you.

1) “I am eligible for a disability support pension and would qualify if our funds were held in superannuation. Instead we have chosen to support ourselves by rolling over to an account based pensions. If the refund of imputation is no longer allowed we will roll back to superannuation and apply for disability support pensions as that would then be the most beneficial financial strategy for us – unfortunately the taxpayer will be worse off as a result.”

2) My husband and I have voted Labor all our lives. He was a welder for 42 years and I had three jobs. I only recently retired after 37 years of working and now help care for my grandchild as childcare is too expensive for my daughter to afford. I still work part time to earn some extra pocket money for my granddaughter, but this means I don’t qualify for the Age Pension. Due to these changes I will now be worse off working. I will have to stop working to qualify for the Age Pension so my husband and I don’t have our franking credits tax return taken from us. This is so unfair, my daughter is a single mother so I help earn a bit more money to ensure my granddaughter does not go without and look less well than her class mates at school. And now I’m told I face being taxed for my share income twice!!

3) I am 68, divorced, and support a dependent adult child. I rent, don't own property, and still work full time. I have sacrificed and “gone without” for many years in an endeavour to be self-sufficient and independent in my retirement – however long that might be.  Most of my assets are in blue chip Australian equities in an SMSF, which I have carefully built up over the years.  Having access to cash franking credits was an integral part of my plan to be independent.  I currently receive approx. $25,000 in franking credits – which pays my rent.  I will lose this under Labor's proposal.

To help my dependent daughter, over the years I have purchased a small portfolio of blue chips for her.  She receives about $800 per annum in franking credits, but because she can only work 1 or 2 days a week in a casual job, her income is below the tax-free threshold. Under Labor, she too will lose this cash refund of franking credits. 

I honestly don’t think politicians can imagine what it’s like to go without and to struggle to look after yourself in your older years.  As soon as you get ahead a bit and your plans start to come to fruition, they change the rules and move the goal posts.  I have been determined to not have to depend on the aged pension but believe I will now have no choice.

I understand they may want to “make ‘the wealthy’ pay their fair share” – but they don’t seem to notice that they only hurt ordinary people trying to do their best.  The “wealthy” have the means to deal with these sort of changes; ordinary folk do not.

It is cruel and morally wrong to impose such change on people who are already retired and can’t do anything to offset it. At the very least, it should be grandfathered, or people’s actual circumstances should be taken into account.

At 68, I simply don’t have time to change direction to counteract this sort of loss.

As you have heard, this retiree tax will cause misery and suffering to low-income earners and modest retirees who have worked, saved and invested under a fair system that should be respected and safeguarded by all sides of politics.

If Labor is not stopped now, I believe they would continue to erode the current system to the detriment of all Australians. Independent MP Kerryn Phelps has introduced the very sound idea of a moratorium on changes to the superannuation system, given people need certainty to plan for their retirement and future. I believe that a large part of Phelps’ success in Wentworth was driven by her overt support for the current dividend imputation system.

The parallels between Labor’s agenda in 2012 and today are interesting. With their eyes on the revenues flowing to Australian mining companies during the mining boom, the Rudd Government tried to introduce the Minerals Resource Rent Tax. Of course, the commodity bull market was in its dying days and the policy was both flawed and poorly timed.  

Similarly, Labor’s attack on the equity market comes in the final stages of a record-breaking bull run. The recent stock market rout has wiped out the 2018 calendar year gains in the US while China’s equity market has fallen by nearly 30% from its peak earlier this year and the Australian market has fallen by over 10% and entered a technical correction.

Bear markets are extremely painful, and we expect the negative effects of the looming bear market will be significantly worse if Labor wins office and introduces their draconian policies. We believe Shorten and Bowen’s plans will have dramatic implications for the equity and property markets, resulting in the first economic recession in Australia for 27 years.

We must all stand up and fight for a fairer future for all Australians. Labor’s policies will not only significantly impact retirees and low-income earners but they will destroy the aspirations of a generation of young Australians.  

References

Abraham, M. (2013). Tax refund for unused franking credits and shareholder pattern change: Australian evidence. International Journal of Social and Behavioural Sciences, 1: 1-15.

Arnott, R. and Asness, C. (2003). Surprise! Higher dividends = higher earnings growth, Financial Analysts Journal, 59: 70-87.

Fidelity Worldwide Investment (2015). Dividend imputation must be retained: submission in response to the FSI from Fidelity Worldwide Investment.

Goldman Sachs Investment Research (2015). Franking credits; eating away at the ‘free lunch’.