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Standing Committee on Economics
20/03/2019
Implications of removing refundable franking credits

ALLAN, Mr Ted, Private capacity

BUCKIS, Mr John, Private capacity

COLLIS, Mr Jamie, Private capacity

FARIS, Mr Irwin, Private capacity

GIRLING, Mr John, Private capacity

HAWKINS, Mr Graeme, Private capacity

HENDERSON, Ms Sarah, Private capacity

MITCHELL, Mr David, Private capacity

MILDENHALL, Mr Trevor, Private capacity

MORGAN-PAYLER, Mr Traff, Private capacity

MORRIS, Mr Andrew, Private capacity

MOUNSEY, Mr Phil, Private capacity

NICOLA, Mr Jim, Private capacity

PARKINSON, Mr David, Private capacity

PIERCE, Mr Roger, Private capacity

POHLMAN, Mr John, Private capacity

POYNTON, Mr Bill, Private capacity

VISE, Ms Margaret, Private capacity

WARD, Mr Graeme, Private capacity

WELLS, Mr Eric, Private capacity

WIGGS, Mr Walter, Private capacity

Witness A

Witness B

Committee met at 15:00

CHAIR ( Mr Tim Wilson ): Good morning, everybody. I declare open this hearing of the House of Representatives Standing Committee on Economics. We were in Mount Martha this morning and we've driven—except for Craig, who caught the ferry—the whole way around Port Phillip to be here. It's good to be in Torquay. This is our final hearing in Victoria and our final one before we go back to Canberra and produce a report.

The ability for investors, including individuals and superannuation funds, to claim their full franking credit refund is an established feature of our tax system and is core to the financial security of retirees. There is community concern about proposals to remove cash refunds for the franking credits of individuals and superannuation funds, including that it amounts to a tax on the savings of retirees. This committee is examining how the removal of refundable franking credits would affect investors, in particular, older Australians who have planned for their retirement based on the existing rules and whose financial security could be compromised. The public hearings provide an opportunity for Australians impacted by a change to refundable franking credits to address the committee directly with a three-minute statement—that's one, two, three minutes. We welcome your contributions and participation. If you would like to speak today, please add your name to the clipboard to register. If you do not put your name on that list, you will not be called.

Before commencing, I remind members of the media present or who may be monitoring—we say hello to our good friends at the Australian Financial Review, who arelistening online, and to our friends at SBS, who I think are here, as well as the Surf Coast Times and other media present—of the need to fairly and accurately report the proceedings of this committee.

Separately, because some people don't seem to understand how tax law works or refundable franking credits or even their own policy, I would like to take this opportunity to formally declare that the superannuation fund that I hold is a SMSF, with my husband, Ryan Bolger, which is called Wilson-Bolger Superannuation and which is listed on the Parliamentary register. It owns WAM Leaders and WAM Capital shares. I don't know why we're specifically mentioning them, but, anyway, we do. This inquiry has no effect on their value, and I can confirm to the best of my knowledge that Labor's policy to scrap refundable franking credits will have zero, nil, nothing, no financial impact at all on me or my superannuation fund, despite the dishonest allegations of others.

Just for clarity, because it comes up at every hearing—and I'm just going to get it out of the way at the start—if anyone wants to draw reference to the parliamentary superannuation scheme, in 2004 the rules were changed. Anyone who was elected after 2004 does not get a defined benefit scheme and will be impacted on retirement by policies such as this exactly like you will be. If you think that's a good debating point, I'm getting it out of the way early that we are under the same schemes as everybody else. Similarly, these hearings are an opportunity to hear from you. They are not a time to ask us questions, because that creates all sorts of lead-ins to debates and those sorts of things. This is an opportunity for statements. If you have questions, afterwards please come and raise them with us directly. It would be fair to say that Mr Kelly and I are from the Liberal Party, and Mr Thistlethwaite is from the Labor Party. If you want to direct your questions to each of us accordingly, that would be the appropriate way to do it—after the hearing.

We are now onto the community statements section. Everyone has three minutes each. Please note that these statements are broadcast and recorded for the public record. I ask that speakers refrain from adversely commenting on other people and exercise caution when speaking about their own or other people's private or financial circumstances. Basically, what you say is going to be recorded in the parliamentary Hansard and it will be there forever and, no, you can't delete it. So, if you don't want it there, don't say it.

Please be aware these proceedings are also being filmed. If you as a member of the public have an objection to being filmed, I think it would be best if you say so at the start of your statement and if you also raise it with the secretariat and the committee will consider your request. We will start with Jamie Collis.

Mr Collis : I am a retired engineer. In my three minutes I want to talk about two or three points that haven't been well covered. I want to put franking credits in context. I can't show everyone the graph I'm holding up, but they can look at it later. If you look at the company tax receipts, it's $91.4 billion. The total franking credits are $34.4 billion. I think most people understand that $5.5 billion is an SMSF cash refund. What is not known, which I have managed to find with a bit of reading, is that approximately $4.5 billion goes in credits to retail industry funds on the pension side of the funds. So pretty much 55 per cent of pension funds are SMSFs and 45 per cent are retail industry funds. What I have seen with this policy is that $5.5 billion is under attack and $4.5 billion is not being challenged or taxed in any way, shape or form. So my question is: if $5.5 billion is unaffordable, why is $4.5 billion not unaffordable?

The second graph I have relates to nonsuperannuants. This is a graph of the tax minus the franking credits. It has income loss on one side and taxable income on the other. If you look at that graph there are a couple of things worth pointing out. The largest loss of income is $9,600 and that occurs for a senior on SAPTO at $33,000. A normal taxpayer will lose $7,400 at $37,000. At incomes greater than $140,000 there is no impact. There is a dotted green line on the graph that I refer to as the franking credits equity line. If you earn $3,300, you will lose $1,000. If you earn $130,000, you will lose $1,000. So what we have here is that a person on $3,300 is going to lose 30 per cent. The person on $130,000 is going to lose 0.7 per cent. So on the left are low-income earners. On the right is the big end of town. The big end of town is largely untouched.

The last point I want to make is about the impact of the policy on people. You hear that the average loss is $2,300. Take a woman or man from 67 to 87—over 20 years—and invest that amount at seven per cent.

CHAIR: Sorry, the dreaded green sign is up for you. If you wish to, you can table any visuals or the remainder of your statement with the secretariat, and it will go into the official record as well. Thank you, Mr Collis. Next up is Traff Morgan-Payler.

Mr Morgan-Payler : Thank you. I'm an 82-year-old self-funded pensioner in the pension stage. My wife is 80 years of age. We will lose approximately 27 per cent of our income. I'm not a tax expert. I'm not an accountant. I'm a humanist. I want to speak on the human side for what is possible and what is not possible. A number of financial advisers we have spoken with have come up with various solutions. They say, 'Don't worry, we can cover this.' I want to point out that this is not true. This is impractical to try and cover. The first reason or method suggested is to completely reorganise your portfolio, selling all your shares, which are safe and providing income, and investing in securities, which will give you around six per cent interest.

We all know the old saying: the higher the interest the higher the risk. At 82—and some of my friends are in their 90s—I'm the immediate past president of the Warrnambool branch of the Association of Independent Retirees, and we have a number of people well into their 80s. When you get into your 80s—you younger people won't understand until you get there!—you are no longer in a situation where you can say, 'Well, if I lose a bit of money here I've got plenty of time to catch it up.' If I lose a bit of money here I've got no time to catch it up. I'm down the drain. Also, as we get older, we get less flexible. For someone to tell me to sell my good, sound shares, which are bringing me in four per cent plus credits, and buy some assets in some fancy set-up—building flats in Central Australia or something—if I lose my money, I'm down the drain and I have to get on the pension.

CHAIR: Thank you so much, Mr Morgan-Payler.

Mr Morgan-Payler : Oh!

CHAIR: Three minutes goes fast, I understand, but you can table the remainder of your statement as a submission.

Mr Morgan-Payler : Grandfather it to make it fair.

CHAIR: I understand, Sir. You can table it. I'm sorry, I need to move on to the next person. Next is Irwin Faris.

Mr Faris : Thank you. I live in Torquay. I address the second term of reference—specifically, the principle that superannuation funds are for the purpose of providing income for people in their retirement. Removal of the refund of franking credits will reduce the income of retirees. However, this submission argues that this will not significantly reduce total wealth and, therefore, the repayment of excess franking credits is not justified.

Let me give you an example. You need to have investor assets of more than $848,000 per couple to be above the level at which you get the pension. If you assume you've got a million dollars to invest and you invest 40 per cent of that in shares and get the average yield for that, which is 4.3 per cent, the amount of money you will lose in franking credits is $5,160. This can be made up to restore your income by withdrawing capital—taking a small amount of money out of your million dollars. This represents a reduction in capital of approximately 0.5 per cent; in other words, the capital will last you 200 years. One invests in shares for both income and capital growth. In almost every year the capital gain will be in the order of 1.5 per cent, perhaps more, so that the net wealth increases. Is it being greedy to demand imputation credits as well as the tax-free capital gain?

The purpose of the fund is to provide the holder's retirement. I would argue that abolishing the present system of paying franking credits is a small price to pay if the money that would have been paid to the shareholder is available, for example, for better healthcare services in the community—which those of us in this age group are likely to need sooner rather than later—or for the education of our grandchildren. My submission is that the continued payment of franking credits is not justified.

Witness A : My husband and I were both part-pensioners until 2015, when, due to an inheritance, I came into quite a number of shares. This of course took us off the pension immediately. We did the right thing and went straight to Centrelink and told them. The changing of the franking credits, though, will more than likely put us back on the pension or else leave us considerably reduced. I don't consider myself wealthy, although we do hear various parties saying 'all the hugely wealthy people'—I don't know too many wealthy people, and, if they are wealthy, it's probably not going to bother them anyway. I think the government really should look at it and say, 'Surely it's better to have people who want to make their own way in life and provide for themselves than to be a certain degree of burden on the state.' I don't know how other people feel about that, but I certainly feel very strongly about it.

Witness B : I didn't know I was listed to speak, to be perfectly honest, but I'll take the opportunity.

CHAIR: You don't need to.

Witness B : No, I will. This is mainly for the deputy chair to consider. The Parliamentary Budget Office costings of 2014-15, the latest that are available, indicate that 983,000 people with taxable income of up to $35,000—and that taxable income includes franking credits—comprised 57.72 per cent of the payments to individual taxpayers. I put this to the deputy chair and his colleagues: $35,000 is not a lot of income. The tax is already being paid at 30c in the dollar. I'll leave it at that; there are other issues, but I won't bother going into them.

Mr Ward : I'll ask the forgiveness of this committee, because, to be quite frank, I thought I'd signed the register of attendance today; that's the honest truth! To be quite frank, I have not prepared my thoughts. I do feel that it's very unfair that those people who have provided—for example, we never had a super fund until I retired from farming. I do feel that it is extremely unfair that the credits will be withdrawn. I wouldn't feel anywhere near so affronted if, for example, the industry super funds lost theirs as well. I feel that the people who are proposing it will say, 'We are governing for all Australians,' and if this goes through I don't think that I will be being looked after. I'm sorry that my thoughts are not more coherent, but I really did think I was signing the attendance register!

CHAIR: Thank you, Mr Ward. Just for clarity, if you hear your name and you do not wish to come and speak, you can decline and no-one will be offended. It's also a reminder to never put your name down on something if you haven't read it! With all due respect, Mr Ward, it does say 'community statement register'.

Ms Vise : I'm a retired nurse. I'm probably going to repeat a lot of what's already been said, but, having saved during my working life, invested for my future and developed a share portfolio which now funds my retirement along with a part-pension, I'm very upset about the fact that I'm going to lose so much of my income and probably be forced onto the full pension. I don't really think that it is fair to change the rules in midstream. Also, it's unfair because I saved any excess money for my retirement and a lot of my colleagues just spent it, and I'm now not being rewarded, am I? It's also going to cost the government and the taxpayers a lot more when we all go onto the full pension. That's about all I can say. I haven't got any statistics.

CHAIR: Thank you, Ms Vise.

Mr Poynton : My comments are largely of a personal nature. I'm a 68-year-old married man with two children and five grandchildren. My wife and I still work to pay our mortgage and pay our bills, and we plan to work as long as we possibly can. As with many others, I followed government encouragement to put as much money as I could into super, with the hope of being able to live out our lives without needing to draw on the rest of society through an age pension. To take control of our finances and avoid the fees and pitfalls that have been so brightly highlighted by the recent royal commission, our superannuation is in a self-managed super fund. Again, encouraged by governments, our self-managed super fund is invested in a range of fully franked dividend-yielding Australian shares. Superannuation changes in the past have almost always been grandfathered. The recent change to the $1.6 million cap, unfortunately, doesn't have any impact on us.

While we recognise that investments have a risk, we certainly did not anticipate the risk of a future government effectively reducing our retirement income by up to 30 per cent. As most of our income goes to necessities, the removal of that 30 per cent will be very hard. How we deal with it and what it really works out like, we don't know; I guess we'll deal with that as it comes. From my point of view, the Labor Party policy is highly discriminatory; it will have little impact on the very wealthy but a big impact on those who have tried to do the right thing and have otherwise maybe just saved enough to get through.

The impacts of this change, in my view, will have significant broader implications. I'm sure even today that anticipation of this policy is one of the things that's dragging down our consumer spending. It certainly reinforces the view: don't trust the government with your money. It's a major disincentive for young people to save in superannuation, as they see these unheralded changes possibly coming in. It will lead, obviously, to increased dependence on the age pension and a loss of value to Australian shares. The list goes on.

Notwithstanding the efforts of this committee and others, the general voter awareness and understanding of this matter is low. From my view, we cannot accept the damage that this policy will have on our economy, and the loss of possibly up to 30 per cent of income from our life savings, without a real fight.

Mr THISTLETHWAITE: Mr Poynton, is your taxable income above the tax-free threshold still?

Mr Poynton : At the moment, probably, just.

Mr THISTLETHWAITE: Is your SMSF still in the accumulation phase?

Mr Poynton : No. I'm in the pension phase.

CHAIR: Thank you, Mr Poynton. Next up is David Parkinson.

Mr Parkinson : After working for 41 years, including eight redundancies, I retired at the age of 59 in 2013, because I couldn't get a job, despite having a master's degree and other qualifications, because people don't like you when you're over 40. So I was dumped. I've operated a self-managed super fund since 1995, and our family decision for me to retire in 2013 was made on the basis of a projected pension income which included excess franking credits as per the 2001 federal legislation. On the base, or non-franked, part of our income, we are able to pay our bills and all the general things you do in a household. We use the franking credits for private health insurance, to take a holiday each year within Australia and to replace things like fridges or other capital things that need to be done. The money is always spent each year and not saved, as we seek to enjoy the twilight years of our lives.

I'm one of the many retirees who now spend this money on health care, tourism and hospitality. Private health cover keeps us off the public health purse, the tourism helps people sell petrol, fly planes, drive buses, fill accommodation, go to tourist attractions, use cafes et cetera, and it keeps small communities functional—all legitimate expenses within the Australian economy. Our retail stores are struggling and certainly need help to survive. Our grey nomads travel the land giving money out to diverse communities in the outback and doing their part. I think of Kevin Rudd giving out his $900 so that he could stimulate the economy to keep us from a recession—and one is just around the corner.

Should this ALP policy proceed into legislation, then my wife and I and many others will be on the public health purse and will not have money for anything except local trips, and we'll have virtually nothing for Harvey Norman. The key point is that this excess franking credit money is and has been spent within the Australian economy. It is not sitting in all of our respective bank accounts waiting to be transferred to the federal government coffers under a Labor government. Chris Bowen has stated repeatedly that, for SMSFs, the $5 billion to $6 billion provided as excess franking credits to invest in Australians will come straight into the Treasury for education, health and debt repayment. The Labor Party doesn't know what debt repayment is. In reality, much of the health money will be used to support people who, under the new regime, cannot afford private health cover. Education is already well funded, certainly compared to when I went to school in a class of 46. Repayment of public debt doesn't sound right when you think that they're going to tax $200 billion and borrow more.

There just will not be $5 billion to $6 billion per annum under the SMSF component available to the government because of the above changes in expenditure. Apart from the above reference I made to how I spend my excess credits, there will be a general panic and lack of trust within the community, and people will start saving, not spending, which will cause a recession. With clever advisers—and I'm one of them myself—assisting people, they will take funds out of dividend-yielding Australian stocks and buy unfranked shares, property shares, property income, overseas stocks and bonds, with our jobs leaving Australia as a consequence. We'll buy unitised shares—Geoff Wilson has told me that will happen so that we won't have any franking credits on any of the WAM products.

CHAIR: Thank you, Mr Parkinson. That's the end of your time. You're welcome to table the remainder of your statement. For clarity, if you've just walked into the room—and there are a few people who have—to get your name on the list of people to speak you need to sign that green clipboard over on your right. Next up is Phil Mounsey.

Mr Mounsey : My wife, Cathy, and I were forced into retirement due to ill health and were not eligible for any government assistance. Despite this, we had both worked hard and made personal sacrifices to ensure that we were self-funded when we retired.

When you retire from the workforce, you need to see a financial adviser who will complete a risk investment profile. In our situation—and ours would be the case for the large majority of self-funded retirees—we were deemed to be moderately conservative investors. This basically equates to holding 40 per cent of your funds in term deposits that return approximately 2½ per cent, with the remaining 60 per cent invested in Australian shares that return around five per cent plus franking credits. Assuming that you have an SMS balance of say $1 million, then you could expect to receive annual income excluding franking credits of approximately $40,000 per annum, comprising $10,000 from the cash component and $30,000 from the dividends. An annual income of just $40,000 per annum is totally insufficient to survive and is made more difficult based on increasing power and private health insurance costs. The latter will cost us approximately $6½ thousand over the next 12 months. Needless to say, if Bill Shorten is elected to government and introduces his unfair retirement tax, then the first decision we will make will be to cancel our private health insurance.

In summary, the proposal by Shorten to cease franking credits refunds is totally unfair and discriminates against older self-funded retirees, whereas industry fund members will not be discriminated against.

CHAIR: Thank you very much, Mr Mounsey. Next is Mr John Pohlman.

Mr Pohlman : Thank you, Mr Chairman. There's no doubt that Chris Bowen's franking credit proposals are a game changer for us self-funded retirees, but most of the commentary and analysis has centred on how much the annual franking credit losses are. The commentary puts the typical annual losses at somewhere between $6,000 and $10,000 per SMSF pensioner. But Bowen's plan isn't for one year. It will go on year after year, so the real sting in the tail will be the accumulation effect over the years. Allowing for a modest two per cent per annum growth in franking credits, which is essentially at inflation, $6,000 will increase year by year and, over 20 years of retirement, will accumulate to around $150,000. And that's per person. For a married couple with equal amounts in super, you can double that to $300,000. If the amount is at the upper end of the scale—say $10,000 per annum in today's terms—you can expect a hit to your super fund balance of $248,000 in 20 years time. Again, that's per person. So, if you and your spouse have similar amounts in your fund, you could be looking at a potential reduction to your nest egg of $500,000. Even if Labor gets turfed out after one term—well, they've got to get in, of course—the likelihood is that they will have already damaged the economy and franking credit cash refunds will be off the agenda for the foreseeable future. We all know that. Options to avoid Bowen's cash grab are limited, so losses of this sort are not only possible but distinctly probable. You need to let your children and your grandchildren know about this. If anyone wants the details of the calculations, you can see me after the meeting.

There's a lot of spin and mistruths being spouted by Labor on this matter, but the biggest con of all is Labor's claim that franking credit refunds are unsustainable. Firstly, franking credits are fully funded by company tax receipts, so the money is always there in advance,. Secondly—and Labor won't tell you this—a dollar given as a credit against one's tax and a dollar given as a cash refund have exactly the same effect on the budget's bottom line. There is about $40 billion in franking credits paid by companies each year. About $36 billion goes to reduce individuals' income tax, while the other $4 billion goes in cash refunds. So, whilst the government pays out $4 billion in cash refunds, it also means that the government misses out on $36 billion in tax receipts, so the total effect on the budget is still $40 billion. Yet, in Bowen's twisted logic, it is only the $4 billion that is unsustainable, but he makes no other mention of the other $36 billion. Bill Shorten's definition of fair is certainly a strange one. When he says 95 per cent won't be affected, all that means is that the five per cent will pay dearly. Next is Mr Ted Allen.

Mr Allen : I am a self-funded retiree and, together with wife and many other people, will be heavily impacted if this proposal is ever to become a reality. I want to take a slightly different tack and discuss one thing that bothers me in particular, and that is that, in my opinion, Labor are lying to the electorate when they continue to say that those who are receiving franking credit refunds have not paid tax and that they are receiving a free government handout. Nothing could be further from the truth. As an example, if you own a share in a company which, out of its profits, decides the dividend of $1 is to be paid, the owner of the share receives 70c. The other 30c is paid to the tax department as tax on that $1 of earnings in the hands of the shareholder. Clearly, the owner of the share has paid tax on that dividend earning. The tax system then deals with each individual circumstance in accordance with the tax bracket in which that income earner sits. A self-managed super fund in pension phase has an effective tax bracket of zero and, in accordance with standard tax return practice, is therefore legally entitled to the refund of the 30c which it has paid on the $1 dividend. Similarly, a fund in accumulation phase in the 15c bracket, having paid 30c upfront, should receive a net franking credit refund of 15c to prevent double taxation on the same $1 of income.

It needs to be understood that imputation credits are attached to dividends to prevent excessive or double taxation on dividend earnings. In the above example, the shareholder in their tax return is required to declare the full $1 dividend in earnings, and the franking credit is then applied as a tax deduction so that the tax which has already been paid is not paid again on the same earnings. Whichever way you look at it, the shareholder has paid tax upfront on the earnings and, in some cases, in the lower tax brackets a refund of the excess tax is payable. In others, such as those in higher income brackets, an additional contribution would be required.

The fact that Labor are misleading the electorate and treating self-funded retirees as low-hanging fruit is, in my opinion, a disgrace, especially when they do not intend to apply the same rules to the union controlled industry funds. I would further point out that, if the proposed Robin Hood were to be implemented—

CHAIR: Sorry, Mr Allen, but you are at the end of your three minutes.

Mr THISTLETHWAITE: Mr Allen, could I ask a question of you? I don't agree with your characterisation, but, if your characterisation is true, why can't foreign investors then claim that tax deduction as well?

Mr Allen : I think if you are a foreign investor and you're earning income in Australia you should pay Australian tax on that income.

Mr THISTLETHWAITE: But you can't claim that deduction and you can't get a cash payment. Therefore, your characterisation can't be true.

Mr Allen : No.

CHAIR: We don't need to enter into a debate.

Mr Allen : I'm happy to discuss it with him.

CHAIR: Perhaps we could discuss it after.

Mr Allen : Can I make one quick point?

CHAIR: Well—

Mr Allen : If this policy becomes law, the cost of earning that income must become tax deductible.

CHAIR: Thank you very much, Mr Allen. Next we have Mr Jim Nicola.

Mr Nicola : My wife and I are self-funded retirees who live in Torquay. We draw our pension from our self-managed superannuation fund. On 20 March 2018, exactly one year ago, I wrote to Mr Shorten concerning Labor's proposed legislation on franking credits. I'd like to read this letter: 'Dear Mr Shorten, re: your proposal to eliminate the refund of franking credits on self-managed superannuation funds which do not pay tax. I am writing to register my and my wife's strongest protest against your proposal to eliminate the refund of franking credits on self-managed superannuation funds in pension phase which do not pay tax. My wife and I, both aged in our late sixties, are self-funded retirees by virtue of our self managed superannuation fund. The fund is in full pension phase and therefore does not pay tax. The pension we receive from the earnings of the fund allows us to live what we believe is a comfortable, modest lifestyle in retirement. We do not draw on the age pension or any other government welfare benefits. Other than our own home, we do not have significant assets outside our self-managed superannuation fund. The fund is almost fully invested in shares of Australian companies which pay fully franked dividends. We believe this to be the best investment strategy for us given our current circumstances, our risk profile and the return we require from the fund.

Your proposal through this tax change will mean that we will receive about 25 to 30 per cent less income from the fund—that is, about $20,000 a year. We consider this to be extremely unfair and cannot understand why we're being penalised to such an extent in such a harsh manner at this stage of our retirement.

We wish to point out the following, which we believe is typical of many Australians who, like us, will be affected by your proposed policy. Both my wife and I worked for almost 40 years and paid our taxes as required. Our financial goals during our working life were (1) to own our own home (2) to provide our children with a good education (3) to be debt free (4) to save enough in our superannuation fund to provide us with enough income in retirement for a comfortable lifestyle. This was done in accordance with the superannuation rules as defined by the government, particularly as we approached our retirement. Indeed, our decision to retire and when we did was greatly influenced by the fact that franking credits would be paid back to the fund when it was in pension phase. We have been able to achieve our financial goals due to being very careful with our spending, saving as much as we could and living what we considered to be a very modest lifestyle. If your proposal to eliminate the refund of franking credits to self-managed superannuation funds is implemented, it will force us to make dramatic changes to our lifestyle for the remainder of our lives.

Given all of the above, could you please provide answers to the following questions. Do you propose to make any changes to the legislation you are proposing to take into account the situation of self-funded retirees such as us? In announcing your policy, you claim that superannuation funds such as ours do not pay tax, but is it not the case'—

CHAIR: I'm sorry, Mr Nicola. We are at the end of your three minutes. As I advised, you can raise these questions directly after the hearing.

Mr THISTLETHWAITE: I can answer those questions at the end.

Mr Nicola : I've written to him many times and still haven't got a response.

CHAIR: I understand. You can raise these questions here and, if he has chosen not to respond, you can raise that. You can also table your statement. Thank you very much, Mr Nicola.

Mr Wells : Firstly, it seems to me that Labor's been playing the political card of envy or class warfare. A recent interview said something along the lines of, 'They would rather put money into hospitals and schools than give it to the well off.' Secondly, whilst that may seem very laudable, retirees have given all their lives through taxation and charities. Thirdly, the great bulk of retirees are not wealthy at all but living quite modestly, and to presume that they are a wealthy class of people is not supported by facts. I would guess it is only the top five to eight per cent that are at all well off, and the ATO could substantiate that one way or the other. The Association of Superannuation Funds of Australia would absolutely rebut the idea of wealthy retirees. The return of franking credits to retirees may well be the difference between having proper hospital cover and having none at all. This is just as credible as some of the Labor hypotheses.

The CEO of Australia's biggest listed investment company, AFIC, which was my very first investment 25 years ago—and I still have it—are scathing in their assessment of this idea. I have a copy here if anyone wishes to read it. I've just read the press announcement that recently said that AFIC sold a big parcel of shares so that retirees or the members of the AFIC would not get caught this half-year by the invidious tax that's being proposed. I would suggest that if any of the listed investment company senior executives were approached they would substantiate what I've just said.

CHAIR: Thank you, Mr Wells. Next up is Roger Pierce.

Mr Pierce : Thanks, Tim. I don't propose to go through our own personal circumstances. I did prepare a bit of a summary scenario that is closely related to my wife's situation and my situation. Like most of you here, we've been hardworking. I was self-employed for most my life, and my wife worked for a substantial part of her working life with the education department, and we'll both be severely affected by this policy. We had planned on setting ourselves up, but, at the time we planned it, it didn't involve Centrelink if we could avoid it.

What I did—and I just thought of this last night—is prepare a couple of rhetorical questions. Consider two retirees each with $1 million in superannuation. One is a retired worker with $1 million in an industry or similar superannuation fund, possibly union sponsored, such as Cbus, HESTA, Rest et cetera. The other, a 'rich' self-employed member of a self-managed superannuation funds with $1 million in their retirement account, will lose around 10 to 15 per cent of their income. The person in the industry fund will really not be affected by this policy, whereas the person who is in a self-managed superannuation fund with a very similar amount of money will be. Is that right, and how is that fair? I'll just add this comment: as the advertising slogan goes, 'Compare the pair'.

CHAIR: Thank you, Mr Pierce. Next up is John Girling.

Mr Girling : I'm a retired chartered accountant, and a tax specialist and financial planner. I could wax lyrical on all of this for the next three hours not three minutes, but I'll attack the ALP ideology. Shareholders are just as important as employees. Without capital there would be no companies to be employers. Company tax paid is a tax deducted from shareholder earnings. Employees get a credit for PAYG deducted; shareholders get a credit for company tax paid.

Superannuants have been promised tax-free pensions for the last 20 years or so by both Liberal and Labor governments. That is why they have saved for their retirement that way. Why should certain pensioners alone pay for increased spending on education et cetera? They've already been doing that for the last 50 years or so. Superannuants with investments of $1.2 million in Australian shares will now have less income than those with $450,000 invested. They would have been better off spending rather than saving.

Consider the health risks. A close friend recently had a heart attack. He was literally brought back to life because someone did CPR on him. He was 68 years old. If he had known that his income was going to be clipped by 30 per cent now perhaps he might have spent some money before he came close. The proposal, therefore, has a retrospective effect. We've never had retrospectivity in taxation before. It's always grandfathered—always. This retrospectivity will really affect the investments we've made for the last 20 years or so.

So what will they tax next—that will be my next thought—capital gains on homes? Why not? They've done it with capital gains on investments. It's now not even covering inflation—

Members of the audience interjecting—

CHAIR: We do need to hear from the witnesses in silence. Sorry, continue sir.

Mr Girling : Inheritance taxes? Why not? Why not tax that? Our Labor-greenie friends are already proposing this. Why not increase the GST? Actually, perhaps increasing the GST would be fairer, because at least it's across the board. Thank you.

CHAIR: Thank you, Mr Girling. Next up is Trevor Mildenhall.

Mr Mildenhall : Thanks for the opportunity. I'm Trevor Mildenhall from Anglesea. I guess one of the things that I want to address is probably more on moral and ethical grounds. The thing that bothers me a little is the idea that people are self-funded retirees, when those that are receiving cash franking credits are being supported by the taxpayer in some way. They're getting supported by the taxpayer rather than being self-funded. So there's a bit of a myth going around about that. I applaud all those who have paid taxes all their life. I think that's a valuable thing that we've all chosen to do. Right through, the way that we do it, we make decisions about applying tax credits, deductions and things like that along the way. Most people are pretty law-abiding about it and have done a good job in establishing Australia as a great country.

There are things that Mr Howard did in 2000 which have given people a false hope, providing them with tax credits that were always unaffordable and were always going to blow out. I think that's a really retrograde step that's been taken in the past. I think that, by taking it back, we can straighten things up a little bit. I think there's an opportunity for us to make sure that the new ethic is about paying taxes and providing for public institutions and public benefit and that we should abide by that rather than looking for every opportunity to reduce, minimise and avoid tax in the future.

Member of the audience interjecting—

CHAIR: We'll listen to the witness in silence. Sorry, Mr Mildenhall; we'll give you an extra five seconds to make up for the gap.

Mr Mildenhall : Thanks very much. I'm not accusing people of avoiding tax or avoiding their responsibilities. I'm just saying that they've been offered the opportunity of receiving what is almost a gift that was provided by Mr Howard in 2000—

Members of the audience interjecting—

CHAIR: Order! Listen to the witness in silence. The same courtesy should be extended to all members of the community regardless of their opinion. As was outlined, another five seconds will be added.

Mr Mildenhall : Thanks very much. Just finally, we all make decisions about how we pay our tax and how we organise our affairs. There are plenty of people who are offering opportunities for people now who will be affected by changing their affairs and things like that. I just asked that people make decisions for the community benefit in the future; that's all. Thank you.

CHAIR: Thank you very much, Mr Mildenhall. You didn't need your extra ten seconds. Next up is Andrew Morris.

Mr Morris : Thank you. I'm a retired accountant. I expect to lose 30 per cent of my dividend income as a result of these changes. Originally, the imputation credit system was brought in to get rid of double taxation so that, if you had someone who was investing via a partnership, a trust or a company, when that owner was paid out $100, that $100 would go through and they would pay at their tax rate. Somehow that got changed with the imputation credit system, although you'll note of course that you do get grossed up when it goes on your tax return—your $70 becomes $100 again. The way I look at it is: that's my $100. You can play around with tax credits; I want the original $100. If in the first place you'd allowed that dividend that was paid out by the company to be a deduction for the company, on that basis the full 100c in the dollar could've come through to the person getting it, and then they would pay at their marginal tax rate.

If you look at the super-fund side of things—and I understand Labor is mostly after the SMSFs—if you've got more than $1.6 million, as I understand it, you've got a separate accumulation account and you're paying tax on that. That tax can then be offset against the imputation credit. But the main thing I'm looking at is: if you actually took the excess earnings on the excess assets and distributed them as a tax distribution—it doesn't have to actually go; it could be a tax distribution, just as you do for a trust or a partnership—that could then land in the hands of the taxpayer member, and they would be taxed at their marginal rate. That's fair and it would be across the board, whether for industry members or SMSFs, and it would reap the government a lot more money. The current system is very unfair because it targets the little guy. Why can't we have a cap? We're told that there are not a lot of little guys affected. If that's the case, it doesn't cost a lot, does it, to allow a $5,000 imputation credit cap?

Thank you for coming to Geelong.

CHAIR: Thank you very much, Mr Morris. Next up, David Mitchell.

Mr Mitchell : Good afternoon. My name is David Mitchell. I'm fairly recently retired and I made my decision based on the current rules. One issue for me in looking at my financial planning as to where I see my future financial position in retirement is with the changes that have been made since I retired. The first of these was the $1.6 million threshold, which I fundamentally didn't have a problem with. I saw that as a net high-worth tax on high-worth individuals. But this tax is affecting me directly, and perhaps if I had realised at the time then I would have deferred my retirement. I think the situation of having it retrospective is difficult, and that's an issue—certainly for me.

I guess the other part of it is that people in the self-funded retiree bracket and above the pension level are fundamentally saving the government the pension. They've worked hard all their lives and strived to avoid that situation, and now this is going to drive people—particularly as you approach the pension limit, when there will be more incentive—to enter the pension. The issue for me is that this is not affecting people who are considered to have high net wealth, who are over the $1.6 million threshold, as previously stated. They're already paying tax on their income once they're over that. They're actually less affected than the people in the middle band who are trying to fund themselves. I have a real issue with that. I think it's got some unintended consequences as such and it's not completely equitable amongst the people affected. That's my fundamental issue.

CHAIR: Okay. Thank you very much, Mr Mitchell. Next up, Sarah Henderson.

Ms Henderson : My name is Sarah Henderson. I'm the federal member for Corangamite and the Assistant Minister for Social Services, Housing and Disability Services. It's very humbling to be in this room and listen to the stories of the very many fine men and women I proudly represent, who've worked hard to support their families and to provide for their future. So many residents have spoken to me about their concern at the prospect of this new tax, which will hit their savings, detrimentally impact their retirement and threatened their long-planned postwork security. It's estimated, Mr Chair, that in the broader local area some 15,000 retirees will be directly impacted by this tax, and, of course, many more thousands will be impacted in the years to come when they do retire. Each and every one of those Australians would rightly feel betrayed, upset and angry by this brazen and, quite frankly, deeply disturbing tax plan. If Labor's proposed tax is proceeded with and legislated, it will profoundly impact on those Australians who have worked hard and saved to be self-reliant. Mr Chair, the retiree tax is unfair, discriminatory and an appalling attack on older Australians. Thank you.

CHAIR: Thank you, Ms Henderson. Next up is Walter Wiggs.

Ms Henderson : I haven't finished.

CHAIR: Sorry. I thought you just said, 'Thank you, Mr Chairman.' Please continue.

Ms Henderson : On Portarlington Road there is a billboard, and it says, 'Stop Labor's retiree tax.' I say to everyone: please spread the word, also to your children and to your grandchildren. This proposed tax grab creates a perverse incentive for Australians not to work hard, to save or to be self-reliant but rather to rely on the age pension. We should be encouraging Australians to invest in Australian companies. Indeed, we certainly should not be altering policy levers radically in a way that would discourage onshore Australian investment by our own citizens.

I'm here today because I cannot, and I will not, stand by and let my constituents—people who have worked hard and contributed to this community and to our economy—be hit by this new tax. No-one—and I say no-one—should be allowed to come along, change the rules and plunge your plans into jeopardy. Labor's proposed tax has caused angst and uncertainty. People are worried; they're concerned about their futures. My job, and our job as members of parliament, is to stand up for our communities; to do what is right. Opposing this tax isn't only the right thing to do; it is our duty to stop something that is so dangerous and so reckless. Thank you very much.

CHAIR: Thank you, Ms Henderson. Apologies for when I thought you'd concluded. Next up is Walter Wiggs and then Graeme Hawkins.

Mr Wiggs : Like a lot of other people here, I'm in my 70s and have been retired for many years. This change, obviously, affects us as well. I won't go into the details, because, let's face it, we're all going to lose a large amount of money from our point of view. The biggest problem is that even if we realign our investments and place them into something other than franking-credit-earning companies then the earning rate on those investments is about the same as an unfranked dividend, which means we're no better off, because we're earning up to that particular level and then we lose the franking credits on anything over that. So we're no better off; whichever way we go, we've got nowhere to turn.

In my case, the loss of income will mean that we'll lose something like $20,000. That is a major factor. It puts us below the pension income level of $79,735 where we can actually get a pension or part-pension and then not be affected by these invidious changes that are about to, or may, happen. The other problem, of course, is that I can't get the pension because my asset level is too high. So, even though I'll be earning less after franking than the income test, my assets will preclude me from getting anything.

If you look at the pension assets test compared to the pension income test, you can have $853,000 worth of assets as a couple and $79,735 of income. To earn $79,735 of income on $853,000, you need to earn 9.35 per cent. Tell me: where can you get 9.35 per cent? So one thing or another is incorrect; we should be allowed, at least, to have a higher asset level if they're going to bring this in or make some changes accordingly.

I have recently been advised that there's a new political party which has started up, called the SMSF and Self-Funded Retirees Party. They plan to put members into the Senate for each state. I would ask anybody who is interested in checking on that to see me. I have some details here. If you're interested in blocking some of these things through the Senate, they are the people who you should be looking at. Thank you.

CHAIR: Thank you, Mr Wiggs. Next up is Graeme Hawkins, and then Mr John Buckis.

Mr Hawkins : I was brought up by my father, who was a bank manager—and the people in this room are of an age that they would remember when banks had bank managers! He impressed on me the need to save for my retirement, which we did. We are now going to be disadvantaged. It won't send us broke, but it will certainly hurt. We will have a reduced income, and it's going to make it harder in our retirement, or what's left of it.

But one of the other things that hasn't been mentioned is that it is also going to impact on my ability to support needy charitable groups. I've spoken to a number of people over the last few months who've said that one of the things that will impact them is whether they will be able to continue to donate to needy charities. So those charities which are exempt from the tax are still going to be hurt.

The impact is not on all superannuants. The unions and the other similar funds are excluded. Therefore it is unfair. Mr Chairman, if one political party changes the rules when it comes into government then a succeeding government can change them back, and it will go back and forth. If the system must be changed, let's have a balanced inquiry to create a fair system, and that is a system that is fair to all and in which everyone can plan for their retirement and not suddenly find that they're standing on the edge of a cliff. Thank you, Mr Chairman.

CHAIR: Thank you, Mr Hawkins. Next up, John Buckis.

Mr Buckis : I'm like a lot of people in this room. I'm a self-funded retiree. A large part of my income depends on franking credits. The previous speaker stole a bit of my thunder—so I'll be fairly brief—and that's on the point of fairness. When introducing the policy of denying franking credits to self-funded retirees, Mr Shorten and Mr Bowen talked about fairness. We know charities will be exempt. We know that the industry super funds will be exempt. And pensioners will be exempt, which I think is fair enough. But he glosses over the fact that there are other tax-free organisations that will be exempt also. That includes the unions, and that includes the CFMEU, whose officials continually seem to flout the law. A former Labor Prime Minister, Mr Bob Hawke, has called for them to be deregistered. They will still be getting their franking credits. The CFMEU, when they amalgamated with the MUA, were reported to have something like $730 million in assets. Yet law-abiding, hardworking Australians who paid our fair share of tax during our working lives and had the foresight to save and invest wisely so we could live independently and comfortably in retirement suddenly find ourselves with the possibility of having the heart ripped out of our golden years. Thank you very much.

CHAIR: Thank you, Mr Buckis. We've reached the end of the list of people who have written their names down. Are there any additional people who have not spoken and who would like to speak? If anyone has not had a chance to say something, they can raise their hand. Otherwise, if you have said something, it will still be timed. I'm not going to take three contributions from one person, but if you would like to make another three-minute statement then we will entertain that until the end of the time frame. Mr Pohlman?

Mr Pohlman : In my dissertation, I got to the fact that, under Bowen's plan, the $36 billion in tax credits is somehow okay but the $4 billion that goes out in cash is no good, yet effectively they're the same thing in terms of budget. One's less money in and one's more money out, but it has the same effect. But what I didn't get to finish was that there's a simple and fair solution to this whole issue as far as I can see. All Mr Bowen needs to do is to reduce the 100 per cent franking credit regime to 90 per cent across the board, with no exceptions. If we go back to my total of $40 billion in franking credits, you'd get 90 per cent. With the 90 per cent mark, $36 billion would still go out to individual shareholders, with no differentiation between a cash refund or a tax credit, and Bowen would get to keep the remaining 10 per cent, or $4 billion. So you end up with the same thing. I don't know if those figures are exactly right, but I'm using them to illustrate my point. So the result would be the same, but the load would be spread across all shareholders evenly and not just retirees—simple and fair, unlike Labor's current proposal. That's about all I've got to say.

CHAIR: Thank you, Mr Pohlman. I saw two hands of those people who have spoken. I just need to clarify again. Is there anyone who has not had a chance to speak but wishes to do so? No? Then you, sir, and then you, sir, come to the front, please.

Mr Morgan-Payler : I'd just like to point out that we all invested our self-managed super funds in good faith, following the law laid down by the government. If any government, of whatever persuasion, cuts this out and says, 'It is not as we did 20 years ago; we're cutting it out,' they'll lose the faith of thousands of citizens. There will be thousands of citizens who suffer. If the government want to be considered as a decent, honest government, they can justify cutting these out some way or other—I don't know how—but the whole system should be grandfathered, as they did with the capital gains tax in '85. I think that is a point that must be looked at if they can honestly feel they're doing the right thing. I don't know. That's the point I'd like to make.

CHAIR: Thank you very much, Mr Morgan-Payler.

Mr Nicola : When I was cut short before, in closing I had mentioned that I had written to Mr Shorten on 12 occasions seeking a response to six specific questions about his legislation, and I'd like to make the following comments and questions concerning this legislation and the correspondence with Mr Shorten. Firstly, if Mr Shorten is so confident about the justification of his legislation, why doesn't he answer my questions? Secondly, to me his attitude and lack of response to my questions bear a strong resemblance and correlation to the attitudes and actions of the executives of the financial institutions which were uncovered by the royal commission into the financial services industry. Thirdly, I ask why his legislation is being made retrospective while the proposed legislation concerning negative gearing is not retrospective. Fourthly, I ask if this is the thin end of the wedge. Once elected, will Labor introduce a death tax and a capital gains tax on the family home? Fifthly, I would like to ask Mr Shorten how he would react if his after-tax parliamentary salary were reduced by 30 per cent just because someone decided to change the rules on politicians' pay. Finally, I would like to thank the many organisations and people who are fighting Labor on this highly unfair and discriminatory legislation. Thank you.

CHAIR: Does anybody else wish to speak? If not, I thank you for your attendance here today. We've found these public submissions very useful and valuable as we've gone around the country; we've gone all across the country. As I said at the start, we have our final hearing in Canberra next week. Please note that written submissions will continue to be accepted throughout the inquiry; admittedly, that basically means you've got a week, but you've also had about four months! To make a written submission, you can speak to John or you can make it online at aph.gov.au/economics.

Resolved that these proceedings be published.

Committee adjourned at 16:15