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Standing Committee on Economics
25/02/2019
Implications of removing refundable franking credits

BACKMAN, Mr Geoff, Private capacity

CANN, Mr Peter, Private capacity

CARTER, Mr Garry, Private capacity

CHANG, Mr Kok Foo, Private capacity

CLAYTON, Mr Peter, Private capacity

DONOVAN, Ms Marlene, Private capacity

DOWNING, Mr David, Private capacity

DIGGINS, Mr Glenn, Private capacity

GALELLIS, Mr Peter, Private capacity

GEORGE, Ms Jo, Private capacity

GRAHAM, Ms Lorraine, Private capacity

HARLEY, Mr David, Private capacity

HOLLINGSWORTH, Ms Jan, Private capacity

KING, Mr Andrew, Private capacity

LOVEGROVE, Mr Kerry, Private capacity

MADDEFORD, Mr Wynt, Private capacity

MARSELL, Mr Bill, Private capacity

MEAKINS, Mr Jon, Private capacity

MOLLER, Mr Ian, Private capacity

PRITCHARD, Mr John, Private capacity

RIDGEWAY, Mr Trevor, Private capacity

SHAW, Mr Geoff, Private capacity

SHEPHERD, Mr Jim, Private capacity

SMITH, Mr Nicholas, Private capacity

SOUTHCOMBE, Mr JW, Private capacity

THOMAS, Mr Trevor, Private capacity

Committee met at 09:30

CHAIR ( Mr Tim Wilson ): Good morning. I declare open this hearing of the House of Representatives Standing Committee on Economics. 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. The 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. This public hearing provides an opportunity for Australians impacted by a change of refundable franking credits to address this committee directly with a three-minute statement. We welcome your contributions and participation. If you would like to speak today, please add your name to the register, which is near the entrance.

Before commencing, I refer members of the media present or who may be monitoring this hearing to the need to fairly and accurately report the proceedings of this committee. Additionally, because this has become a rather silly issue, I would like to take this opportunity to formally declare that the superannuation fund which I hold with my husband Ryan, which is called Wilson-Bolger Superannuation, owns WAM Leaders and WAM Capital shares. This inquiry has no effect on their value and I confirm that, to the best of my knowledge, Labor's policy to scrap refundable franking credits will have no financial impact on me or my superannuation fund because I have a 45 per cent marginal tax rate and I'm 38, rather than being about 65 with a zero per cent marginal tax rate. Apparently some people don't understand their own policies, so we have to declare that now.

I will introduce each speaker and invite them to speak into the microphone provided. The secretariat will indicate to you with a sign when you have spoken for three minutes. I will then introduce the next speaker. Please note that these statements are broadcast and recorded for the public record. So they're not just broadcast here; they go live to Canberra, where somebody transcribes them into the parliamentary Hansard, and they are available on the internet to the world including to our friends in the media. Therefore, I ask speakers to refrain from adversely commenting on other people and exercise caution when speaking about their own or other people's private or financial circumstances. That means be nice and, if you don't want something on the public record, it's probably best not to say it. Please be aware that these proceedings may be filmed. If members of the public have objections to being filmed, please raise them with the secretariat. The committee, which is all of us, will consider your request. I'll be reading out the names of people to speak in the order in which they appear on the list. I will allow committee members to ask clarifying questions, which is not an excuse on either side to make a long case about why they should be in favor or against the policy, only an opportunity to ask specific questions related to somebody's statement and, as I said, only for the purpose of clarification and to keep it as tight as possible. That goes for both sides of the debate.

So I will do this by inviting the first person up and then mentioning the name of the next person. If they could make their way to the front and sit in the next seat, going in tandem, we won't lose valuable minutes waiting for people to come up to the front. The first person is Glenn Diggins, followed by Lorraine Graham.

Mr Diggins : Thank you, Chairman and committee, for listening to me. I live in Albany. I will be 80 years old next year. I have a super fund with approximately $600,000 in it. It is invested entirely in Australian securities that pay fully franked shares. For the last few years my grossed up income—that is, dividends grossed up to include franking credits—have been in the order of $38,000. So let's say I've got grossed up and then in hand $38,000. Then the $38,000 will remain my grossed up income and suddenly my net in-hand income will drop by $11,000 to $27,000, and then onwards from there it will be $27,000 in hand and $38,000 net income. The $38,000 equates to about a 6½ per cent return on my investment in my super fund. I have no other income that comes in. I get a bit of interest in my account each year, but it wouldn't amount to $10. That's the first thing I want to mention.

The second thing I want to mention is that, had exactly the same investment been either in an industry fund or a large retail fund, because that fund is taxed as an individual, they are able to avoid losing the franking credits that I will lose, which to me is a total way of discriminating between taxpayers. Thirdly, seeing I've only got three minutes, I want to mention that, like many people in this room who are living older these days, at some stage if you live long enough you're going to finish up in a nursing home. To get into a nursing home with my current $600,000 would possibly be enough, maybe. But to be self-supporting you'd also have to fund yourself up to the $40,000 or $50,000 board and lodging once you're into the nursing home. So I need to attempt to maintain the value of my fund for as long as possible. It isn't an option for us to sell our house. My wife is 14 years younger than I am. When she gets around to being in a nursing home, I probably will have been there for some years. You only have one house; you can only sell it once.

Finally, the thing that really has not been mentioned in this debate about this policy is the strain and the mental anguish it is actually placing upon people.

CHAIR: Thank you, Mr Diggins. Next is Lorraine Graham, then Jo George.

Ms Graham : I have sent in three submissions—No. 222 and two others not yet on the website. All are available at Laney.com.au/submissions. This policy unfairly targets low-income earners. The argument that these people also have huge incomes from tax-free super defies logic. Some of them may, but this is no reason to disadvantage those who don't. Are the ALP really so desperate for extra revenue that they would deny a legitimate 6K tax refund to someone earning 20K year, who would then have two survive on 14K? Some retirees will reduce their assets to qualify for a part-pension. Others will change the way they invest if they have a trust and interest income. Companies will issue listed debt securities so investors can earn interest instead of dividends, and listed investment companies will become trusts. Self-managed superfunds will be the hardest hit, and many of them will roll over to public funds or simply close down. This will adversely affect the viability of hundreds of small accounting firms. With more people on the pension and fewer retirees choosing to own shares, this poorly targeted and highly disruptive policy will raise little, if any, net revenue. As well, it creates a huge disincentive for anyone to save enough for an independent retirement.

The proposed timing is untenable. With the election in May, the legislation is unlikely to be in place by the start date in July, leaving no window for companies and investors to react. A change as sweeping as this needs at least a year's notice from when it becomes law to when it is implemented. There are much better ways of raising extra revenue that are fair to everyone. Outlaw share buybacks with a franked dividend component. These only benefit zero and low-rate taxpayers, so most of the distributed franking credit becomes a cash refund. The recent BHP buyback will see nearly $3 billion given back as cash. These buybacks can be replaced by special dividends benefiting all shareholders. No-one would object to this.

Leave the franking credit system as it is and instead address the real problem, which is the tax-free status of the earnings on pension mode super. The current system allows anyone over 60 to pay little or no tax on quite high incomes and is far too generous. Change the system so all earnings on super are taxed at 15 per cent for both accumulation and pension mode. This is easy to understand, asset choice neutral, easy to implement, would simplify the current system and would be fair to everyone. It would raise well over the required $5 billion a year, with no effect on low-income retirees and with only a small cost to those with income from super. This change could be phased in over three to five years. At the same time, restore the previous asset taper rules for pensions and reduce the deeming rates to something more in line with current bank interest rates.

I've been an investor for 25 years and I do know what investors did prior to 2000, but it would not work with the current tax system. I can talk about this later today if there's enough time.

CHAIR: Thank you, Ms Graham. Next is Jo George and then David Harley.

Ms George : I'm a member of the National Seniors Australia and I would like first to give a rendition of my own observations. In all these recommendations, the emphasis is on those who have or had compulsory superannuation, but there is no mention of the number of women due to age, retired from the paid workforce, along with their husbands, before 1992, when super came in. So they never had any benefit of super, and many of them had married returned servicemen and, due to a break in their working career, started their marriage with little savings and went on to have families, with the mother staying out of the workforce to raise the children. Many couples managed to buy a car for the husband to get to work, but of little benefit to the wife—only when husband not at work. Some of these families were very poor, especially in low socioeconomic areas.

I will now give a small submission taken from varying notable submissions. The ALP's plan to disallow franking credit refunds will have its greatest impact on older women—me being almost 92. Not only do older women claim the greatest number of franking credits as a group by age and gender, but they are also more likely to have little or no superannuation to fall back on. Older Australians are overrepresented when it comes to direct share ownership. According to Treasury data, over half of the 1.1 million individuals who received franking credit refunds in 2014-15 were over the age of 65. That is around 16 per cent of the 3.6 million Australian residents in that age group.

The introduction of compulsory superannuation in 1992 was a significant step forward for women in the workforce. It was no longer only for public servants and senior managers. Whereas less than a third of female workers had super prior to 1987, coverage increased to over 75 per cent of female workers in 1992. However, due to lower salaries, career breaks and a tendency for casual work, women tend to have smaller super balances than men, or none at all. This is especially true in older generations, where women played a more traditional role as wives and mothers. Many women returning to work in a self-employed or part-time capacity are not eligible for compulsory superannuation. Also, many are likely to be involuntary retirees, leaving the workforce prior to age 65 to care for older partners or parents or other family members.

CHAIR: I'm sorry, we're at the end of your three minutes, but you are welcome to table your document as a submission if you would like to. Next is David Harley.

Mr Harley : Thank you. I am very grateful that you're giving us this opportunity to say some words about this proposal by the ALP. I'm have a self managed superannuation fund jointly with my wife. I don't know whether you know this but the self managed superannuation funds have two accounts. One is a pension account, which benefits from the rebate of franking credits. The second one is the accumulation account. Bearing in mind that the funds that fall below the cap stay in the pension fund pension account. The balance in the accumulation account flows into an account that pays 15 per cent tax. The pension account does not pay tax. Our situation is that we cannot fund what we've decided to get out of the pension account. The amount of funds we receive from dividends, interest and the franking credits does make up that figure. But without the franking credits it will not.

I find it a bit inconsistent—the ALP senior politicians saying that the principle of this proposal is that those who don't pay tax, the retirees, shouldn't receive these franking credits. Well, that's nonsense because the people who have accumulation accounts do pay tax. It's 15 per cent of the income. That's the main point. In reading Robert Gottliebsen's column in The Weekend Australian he points out that if the franking credits are abandoned then that is a tax—in his mind, and I think he's probably quite right that if you don't receive franking credits you are paying tax. In fact, it's double taxation. The company has paid tax. Then, the people who receive franking credits are benefiting under the current system for not paying tax—the tax is being refunded because it's already been paid by the company that pays the dividends. That, essentially, is the thrust in my opinion—the inconsistency—

CHAIR: Thank you, Mr Harley, that is your three minutes. Next is David Downing and then Garry Carter.

Mr Downing : Thanks for the opportunity to speak. The criteria for this presentation is how the changes to franking credits will affect me. I'm in a better than average financial position. How has this eventuated? In my working life, since the age of 21, I have not worked less than 60 to 70 hours per week. For 25 of those years I worked 363 days a year, which meant no weekends, no public holidays, no paid annual leave, no long service leave and no sick pay. Therefore, it's only natural that I would accrue more than the average worker doing 40 hours per week. This now makes me a filthy rich person in the eyes of the Labor Party. I certainly have benefited from all my effort, but benefits have also flowed through to the Australian economy. I did this to ensure a comfortable future for myself and to ensure I would not be a burden on the government in retirement, just like governments of the day asked of me. Why am I now the enemy of the state?

Changes to franking credit rules will reduce my annual income by approximately 25 per cent. Superannuation rules were recently changed and divided superannuees into three bands. Those with assets under $823,000 receiving full or partial pension healthcare cards and other applicable concessions will receive the full refund of their franking credits. Those with assets over $1.6 million, described last week by Chris Bowen as 'megarich people', are now required to pay 15 per cent income tax on their accumulation fund. Due to them paying the 15 per cent income tax, they will receive half of their franking credits to offset the tax payable. People in the middle who have assets between $823,000 and $1.6 million will receive zero franking credits. How can this be fair or reasonable?

But this isn't only about my circumstances. We've all been brainwashed as to what a great country Australia is to do business with or invest in because of our government's stability. I have for years been encouraged by governments—and in fact been given incentives by these governments—to put more and more money into superannuation to allow me a better standard of retirement. By the government allowing franking credits, they have encouraged me to invest my money in Australian companies. These incentives were not just for me as an individual but for the benefit of the whole country.

Now that I've reached an age where there is no further choice of employment and my money is locked down under the rules of superannuation, another government is proposing to plunder my savings, the nest egg that previous governments encouraged me to build. A similar example is governments that encouraged people by paying rebates to have them install solar panels on their houses now considering taxing these same people because they have solar panels on their roof. What sort of stability does this represent? The constant changing of tax rules kills incentive for hard work. The result of individuals' hard work benefits all Australians. Already my children and grandchildren are stating: 'What is the point of working any harder to prepare for a better future when governments will merely find ways to take it off you at the end?'

CHAIR: Thank you. If you wish to table the remainder of your statement, you're welcome to do so. Next is Gary Carter.

Mr Carter : Thank you, Mr Chairman. I am very concerned because I'm in a similar situation to virtually everybody else in this room. But what I want to try and find out today is: is this proposed tax constitutional? Also: has the Labor Party considered the consequence of ripping $6 billion dollars per year out of the economy? This money is spent by retirees. And it is totally spent; it can't be accumulated, or very rarely accumulated. I'm just wondering what sort of recession—I mean, the retail sector of our economy is struggling already and the housing sector is struggling already. Who else? What other sectors are going to be badly affected by this? I think the country will be plunged into a recession by this mad proposal by the Labor Party. Thank you.

CHAIR: Thank you. Kerry Lovegrove.

Mr Lovegrove : Good morning, ladies and gentlemen, and gentlemen of the government. I have a statement I'd like to read out. If anybody from the press would like a copy of it afterwards, it's theirs. I'm a self-funded retiree. I commenced employment life when I was 16 years of age. I was employed for 55 years and paid taxes for this entire period, without burdening the Australian taxpayer with tax-funded welfare. Prior to retiring in 2013, I investigated various methods of becoming self-sustainable and to be able to meet all financial commitments in my retirement years under a self-funded system. It was quite evident under the superannuation legislation at the time that the best strategy was to acquire equities that paid reasonable dividends with dividend imputation and franking credits. The income and allocated pension available to me utilising this plan was reasonable. However, it was not excessive and was far less than the income derived from a parliamentary pension. It also certainly required the input of the imputation and franking credits to be considered sustainable.

The proposed changes to the legislation whereby the imputation credits are diverted to the government system would be extremely unfair. As a consequence of Mr Shorten's proposed policy of removing imputation credits from investor income and diverting it to a tax system—which ironically supplements his own pension—I intend to take up Mr Bowen's suggestion as stated on television and boycott the Labor vote in the coming election, and I urge all current retirees to do the same. This proposed legislation will also affect future self-funded retirees. I therefore also urge these affected persons to do likewise and boycott the Labor vote until common sense prevails.

CHAIR: Thank you. Geoff Backman.

Mr Backman : Good morning. I am a member of the Australian Shareholders' Association. We meet each month, and one of our senior organisers who was a chartered accountant said to me over coffee, 'It'll be easier for Shorten to get elected than it will be for him to get that franking credit policy through the Senate,' and I'll address my question to you, Tim. What do you think about that? How hard will it be to get it through the Senate?

CHAIR: Firstly, it's not normal practice that we get asked questions. It's an opportunity for you to give community statements. All of that is dependent of course on the results of the next federal election. I don't have a crystal ball.

Mr Backman : No. I guess so.

CHAIR: Would you like to continue with your community statement?

Mr Backman : No. I endorse everything that's been said here this morning. I'm in much the same position as everybody else. I don't have a superannuation fund. I just have income from shares et cetera. I will be affected quite a lot by this. It's going to make life a little bit more difficult. I'll have to draw down on cash reserves that I've got. And of course when they run out I guess I'll just go and get the pension, which I don't have now. Thank you.

CHAIR: Thank you. Marlene Donovan.

Ms Donovan : Good morning, gentlemen. My name's Marlene Donovan. I'm a retired schoolteacher. I retired at the beginning of 2001 after 27 years of working as a classroom teacher. In my previous life as a married woman, I was not permitted to have permanency for some five or six years after returning to work due to the policy of the department at that time. Married women—unless they were the sole breadwinner—had to fight to get permanency and therefore eligibility to be able to pay into the government superannuation fund. As part of my financial strategy, I turned to becoming a buyer of shares and things to give me an additional income. I am a self-funded retiree—not a great income, but sufficient. On my retirement, in order to supplement that—the income credits have become not a necessary part of life but nevertheless they added to my income and make my life in retirement more comfortable.

I endorse everything that has been said here this morning, but I'm purely acting on my own behalf here and just putting forward that the imputation credits that I will now be deprived of, should the Labor government go forth—it will mean that I will not be able to do some of the things that I would normally be able to do. I have never, ever asked anything of any government as far as supporting me. I have my own medical fund, which I attend. I'm not a public patient, but the imputation credits allow me to pay for all the essentials along those lines. Without them, I bite into my small but adequate allocated pension. Thank you.

CHAIR: Mr Kelly wants to ask you one clarifying question.

Mr CRAIG KELLY: You said you were a school teacher. Was that high school or primary school?

Ms Donovan : Both. I did primary, then went into the secondary division, then also the correspondence section. Being a married woman, at that point in time I couldn't go for promotion in the country or anything like that.

Mr CRAIG KELLY: What year did you teach until?

Ms Donovan : I started with grade 1s and went up to year 10s and retired as an ESL teacher at Balga Senior High School, where I was teaching English to migrant children.

Mr Thomas : I can't give you the mathematics of the subject for myself. I want to just indicate to you that this proposal is going to be so destructive of the values and personal aspirations of so many people of probity and high personal values. I'll explain why. I arrived here in late 1961 and had lived here ever since. I well remember JF Kennedy's statement in the early 1960s, 'Think not what your country can do for you, but what you can do for your country.' Trite as this recorded utterance may have become through constant repetition over the years, it resonated with me, as I was then a young man of considerable conviction, having already eschewed the character failings of hedonism, mendacity and selfish opportunism. I am now 74 years old. The intervening years were targeted towards never being a financial burden on my government's taxpayer funded community coffers. It has entailed a lifetime of sacrifice and deliberate limitation of expenditure. I sought to be self-funded in retirement and I am very proud to still be so at the age of 74. It is not easy. I am told I may be eligible for a tiny pension or, alternatively, a Commonwealth senior's health card. I have not sought either and, at some sacrifice, pay in full for all those services that otherwise I could enjoy the appropriate concessions for. I know of other people who similarly, at considerable sacrifice, strive to stay off the public purse.

I will get to my point. Should Shorten succeed in his proposal to remove excess franking credits, I will be placed in the invidious position of having to seek government assistance, which is total anathema to my lifelong goals and aims. The proposal planned is sleazy, underhand and despicable. It strikes at the very heart and soul of decent community minded persons such as my wife and I.

Mr Marsell : A lot of what I want to say has been said, so I'll make this very short. Hard-working Australians who paid tax all their lives, saved conscientiously and planned for their retirement according to the rules of the day, and because of this they have not drawn a government pension. Shifting the goalposts on these people is not only unfair; it is also immoral. This group of Australians organised their retirement in such a way and at such a given time as to rely heavily on receiving their franking credits on their retirement according to the rules of the day. The Labor Party now intends to punish these hard-working Australians, most of whom sacrificed many luxuries in life so as to become independent from receiving a government pension. What would be fair is to grandfather Labor's proposal and proposed legislation on franking credits.

Mr Southcombe : I will endorse everything that the earlier speakers have said. I won't repeat them, for obvious reasons. I am a self-funded retiree and do not get a state pension at the moment. I am the main source of income for my wife and myself. We are not megarich by any stretch of the imagination. Last year I received franking credits of nominally about 4½ thousand dollars, but I will not be able to claim that if this Labor policy proceeds. That's my understanding of the policy. Like everybody else, I've always strived to be totally independent and tried to not be a burden on the government. My concern is, will my current savings last for my life—I'm 80—and will they last for my wife's life—she is seven years younger than I; so she can expect to live for another 15 to 20 years, hopefully.

If the franking credits policy comes in, it will severely limit my income and it will cause stress when I have to pay the bills—the rates, the electricity bills, the gas, the water et cetera, which for me, rightly or wrongly, amount to about $11,000 or $12,000 per annum. I don't have a house to downsize. We've already downsized and live in a modest villa. We happen to live over in the postcode 6019. I do appreciate and value Medicare card, although I do have a private health fund as well, so I recognise that I take something from the government. Like everybody else, I've spent a hard life working and contributing to government funds.

It seems to me that one solution could be to have a sliding scale, if this franking credit policy has to be installed. One of the other speakers explained in more detail than I, and I wouldn't mind catching up with him. It does surprise me that ALP purports to represent the people of Australia, yet it is ready to take money away from seniors and, to my understanding, is prepared to give it away to other Australians, and always ensures that its perks and retirement funds are very well funded.

Name Withheld : I'm a retired farmer. I retired at the age of 65. Together with my wife we have a self managed super fund which I think we set up in the late 1980s or early 1990s. For the next 10 years I worked in seeding and harvest so I could maintain a comfortable lifestyle without imposing or seeking any government pension or part pension. In the last three years we've been slowly bleeding off a few low-yielding shares out of our super fund to maintain a reasonable standard of living. If franking credit refunds are abolished, I can see that accelerating to the point where, within a year or two, we may have to start seeking a part pension from the government. From what I can see, it might be a short term gain for the government, but I think in the longer term all it's going to do is force a lot more people onto a bigger pension. I'm 78 years old now. I've worked pretty hard for most of my life, and I'm hoping to stay free of any government assistance. If this franking credit remains and I can continue to do a little odd job here and there, maybe I can stay free of government assistance. It's a question of pride as well. A lot of people have worked pretty hard and tried to provide for their own comfortable retirement. I see this Labor policy is detrimental to that.

Name Withheld: Good morning, everyone, and thank you for coming to Perth. I'm just going to read an email that I recently sent to someone who is a journalist: 'I have just finished reading your article. It's quite comprehensive, but unfortunately you have omitted a few very important facts. Yes, I'm a self-funded retiree and my husband and I do not get a government pension. Franking credit refunds are paid back to all shareholders. These include industry super funds, retail super funds, SMSFs and individuals, also charities and unions and any other organisations who are shareholders. All pension account holders who own shares get these franking credits refunded. It is not just limited to self-managed super funds. Example: retirees who are in pension mode, tax-free, in an industry super fund get these refunds back to them. They are supposed to be refunded to the pension account holders in retail funds. Labor's proposed policy is only going to target self-managed super fund pension account holders like myself or individuals who have shares not in a super fund, like my 87-year-old mother, whose investments she lives off. If a pensioner is in receipt of the government part pension currently, before 28 March last year, and also has an SMSF up to the value of, say, $800,000, they will continue to receive their franking credits. An income of that plus the pension will put this in excess of the income that my husband and I currently obtain from our super fund. Pensioners belonging to an industry super fund will continue to receive franking credits. Unions are big holders of company shares. They pay no tax. They are in receipt of some of the biggest franking credit refunds in dollar terms than anyone else. Listed charities pay no tax. They will have investment in companies. They all receive franking credit refunds.'

Mr Smith : I have prepared a statement. After a few opening remarks I will seek to ask a question, acknowledging that you've said that it's not normal for questions to be fought. I will still put a question, with respect. Like all of my friends here today, I'm a contributor to a self managed superannuation fund with my wife. My wife is 70. We have only just retired from running our family business. Because of the low interest environment that has abounded in Australia for so long, all of our superannuation funds are invested in the Australian stock market. When we were planning to provide for ourselves, the existence of the franking credits was a very fundamental element of all our planning. I think, like everyone else, that if franking credits go we will suffer a loss of about 25 per cent of our current income.

My question, Mr Chairman, which I understand you may not wish to take further, is: following your disclosure of interest or conflicts this morning, I am curious to know if I might put a question about conflicts?

CHAIR: Certainly.

Mr Smith : My question really is to your cousin, Mr Wilson, and Mr Keogh.

CHAIR: We didn't establish that we were related. It was a discussion of hypotheticals.

Mr Smith : I had assumed that committees such as this honourable committee would always approach matters with an open mind, and my question to your nonrelation and your other nonrelation is: as Mr Shorten and Mr Bowen have both said they're not for turning and the franking credit confiscation will happen, come what may—and don't vote for us if you don't like it—is that your position?

CHAIR: As I said, it's not customary for committee members to be asked questions. That would be put as a statement. But I'll allow the others to respond, but only if they wish to. And it should not be interpreted in any way if they choose not to.

Mr Smith : No, I understand.

Mr KEOGH: I think the only thing that can be said in response to that, Mr Smith, is that you go to the heart of the political nature of the inquiry being conducted by the government members of this committee. It has never happened that there has been a parliamentary inquiry into an opposition policy before.

Mr JOSH WILSON: And the chair personally authorises, in his capacity as chair of the committee, a website which is called Stop the Retirement Tax, and it includes submissions that he has written that people who go to the website submit for him to consider as chair of the committee. So you might want to put those sorts of questions to the chair.

CHAIR: I don't want to turn this into a throw back and forth. Those weren't answers to your explicit question. I'm interpreting that as: you don't want to answer that question. So I think that's your answer, Mr Smith.

Mr Smith : That's how I have understood it. I have one more question which, again, is on conflict. But before posing that question, I will just make this final observation. Quite easily for me, the most offensive and upsetting aspect of this whole wretched business has been that it is being proposed and, if successful, it will be imposed by politicians who are members of a defined benefit superannuation fund themselves.

CHAIR: I'm sorry, we're going to have to wrap this up, Mr Smith. But, just for clarity, anyone elected after 2004, including all members here present, do not have a defined benefit scheme. That is just for clarification. Thank you Mr Smith. Next up is Jon Meakins.

Mr Meakins : Thanks, gentlemen, for the opportunity to speak today. I didn't realise I was going to be up here. I left school at 14 and started work at 15. I brought up the family of six children. I sent them all to private colleges on a salary and a wage. I worked for 57 years. Like a couple of other gentlemen here, I decided in life that I would never ever go on a pension, and I've worked very hard to get to that situation. I got up this morning and found myself in the top four per cent of the people that are going to be affected by this, and I am seriously offended. I'm being treated as a second-class citizen, like most of the other people in this room. Thank you.

CHAIR: Thank you, Mr Meakins. Next is Trevor Ridgeway. Please begin.

Mr Ridgeway : This is my submission.

CHAIR: It is tabled as a submission. Thank you.

Mr Ridgeway : The reason I'm tabling it is that it takes too long to read and it virtually reiterates everything that everybody else has said. But I do have a submission apart from that.

Investment returns on shares in business enterprises are not guaranteed or secure. The fact is, most businesses fail. To invest successfully usually involves many losses. These are the risks that all investors face. Fortunately, the profits generally offset the losses. Dividends are paid only by successful businesses. If not, your investment also fails—for example, Babcock & Brown and Sons of Gwalia. The government is always willing to share your profits with you in the form of income tax, GST, capital gains tax and the like, but does very little when you incur a loss. They don't suffer the anxiety and pressure that the individual experiences. And, remember, the individual is already using after-tax dollars to invest and take that risk as a means of avoiding poverty and of potentially creating wealth and independence for themselves.

Wealth gives you choice, even allowing benevolence and philanthropy. Poverty merely creates burdens. This is what the capitalist system has done so well and it is what is dragging millions of people out of poverty all over the world. So, we know it works. It isn't broken. It doesn't need fixing. What needs fixing is not how to make the rich poor but how to make the poor richer. That's the right mindset. While it's true that you can offset some losses against some profits so that you pay less tax it is still you taking 100 per cent of the risk. To do so without reward—in other words, profit—would make such investment a stupid idea, and no-one will invest under those conditions. Yet, socialists continue to spend the wealth created by capitalists whilst denigrating and attempting to destroy the system that has allowed the emergence of our supreme Western civilisation, all the time enjoying its benefits and advantages and luxuries whilst pining for their stupid Marxist utopia. Despite the fact that this has been tried and horrifically failed and killed hundreds of millions of people in the USSR, China, Cambodia, North Korea, Cuba, and now in Venezuela, they persist with their nonsense and misguided ideology. Stealing and killing and lying are merely tools they resort to when they can't win the factual debate.

CHAIR: As much as you may have sympathies, members of the audience, I'm sorry, Mr Ridgeway, but that is the end of your submission. But we have a tabled submission.

Mr Ridgeway : Well, I'm sorry, there's a little bit that I'm going to put on the end of it.

CHAIR: If it's a couple of seconds.

Mr Ridgeway : It will be. It is patently unfair to all of us who have structured our finances so as to be financially secure and independent in our old age and yet the socialists show their contempt for provident individuals by changing the rules, not to benefit anyone but just to harm those who ideologically oppose them.

CHAIR: Thank you, Mr Ridgeway. Next is Peter Galellis.

Mr Galellis : I am 70 years of age. I'm retired. I have a wife five years younger than me, who is retired. I saw the ad in the paper on Saturday and I'm down here today. I considered what I wanted to say. Largely, I'm affected in the same way that a lot of these people are. My wife and I have been salary and wage earners all our lives. I am surprised to find myself in this elite group of super rich, who don't deserve to get franking credits. My wife and I met in Sydney in 1973 and we married in 1974. I was working as a postie and I was a casual waiter on the weekends. My wife was an office worker. We moved to Perth in 1974, because Sydney was unaffordable. As it is now, it was then. We built a home and raised three children.

In the 1990s we started investing in shares and, through dividend investment, those shares increased in value. As we approached retirement and sought financial planning we were advised to spend our money, to give it away, or to put the money into our house in order to maximise the old age pension. We thought that was ridiculous. It's against our values. We wanted to not be a burden to taxpayers, including our own children. We set up a self managed super fund with two other family members. When I retired at 65 my wife, five years younger, chose to stay on and through salary sacrifice built up her superannuation. The total value of the superannuation fund with four members doesn't come close to being half the limit at which the super-rich are supposed to be at.

To be impacted by the lack of the franking credits will significantly affect our ability to maintain an adequate retirement. Like a lot of people here, we pay for private health insurance. Talking about the impact of this policy, I recently had a heart attack and when a doctor asked if I was under any stress my wife immediately said, 'Yes, Bill Shorten and franking credits.' My time's expired but if I could continue. One of the things that disturbs me the most is that young people have told me—

CHAIR: Sorry, we need to be fair to everybody so they have the capacity to say something. You've had your three minutes and I need to invite the next person, Mr Kok Foo Chang, to speak. If there is time at the end you will be welcome to add a further submission.

Mr Chang : I'm so glad to see a big family here, but I do look different, because I've got my hair dyed! I'm 78. I first came to Australia in 1962, to study. I then worked for two years at the Fremantle Port Authority as a mechanical engineer. I returned to Malaysia in 1971 and came back here to live in 1989. Because of my short time working here I could not accumulate much superannuation. Legally, under prevailing law, my wife and I tried to live very cheaply and put some money into shares. In those days—I might as well mention it to all my family here—can you imagine that you could buy Bank of Queensland shares for a dollar and Woodside for $2.40. All in all, we accumulated a small share portfolio and now I get dividends, as well as fixed deposit interest, to a total of $38,000. It's not a big sum. On that, I pay $3,900 tax, after Medicare and after all the offsets, using my imputation credit of $10,000, and have a net refund of $7,000, too. The $38,000, plus $7,000, too, is roughly equivalent to $45,000. So, I live on $45,000. It is not filthy rich. My wife and I have tried very hard to avoid a part pension. We are qualified for a part pension but we didn't apply for it. Now, with Bill Shorten and his party team, if he cannot afford this money, they should go to look for it somewhere and not on us. Go for it somewhere else. After all, Julia and Kevin Rudd wasted $3 billion on opening up border protection. And, on top of that, Kevin Rudd also wasted $2 billion on insulation and giving money to schools to build halls without sinks. Can you imagine that? It was all wasted. Why do you come and not only humiliate us but also insult us?

CHAIR: Thank you, Mr Chang. Next up is Ian Moller.

Mr Moller : I'm making this submission on behalf of my wife, Valmai, and myself. We are self-funded retirees with a self-managed super fund which is in pension phase. We are both in our 80s. My wife retired from working life at the age of 55 in 1990, and I retired at 60 in 1996, except that I continued to provide consulting services after retirement. If the ALP is successful in the forthcoming federal election and the policy of Labor not to pay a tax-free refund on franking credits to certain segments of investors is implemented, we will lose 29.33 per cent of our retirement income, based on our 2017-18 returns. With this cut to our income, we will not be able to pay for care and services we need to stay in our home for as long as possible. We are not the so-called wealthy that the ALP purports to paint us as. We have both worked on salaries. We were just hardworking Australians who saved and followed expert advice and invested in companies that paid fully franked dividends. This has put us into a position where we are not a burden on the public purse and do not rely on government handouts.

The refund of the franking credits is not a taxpayer funded handout. This is a return of tax paid by companies on behalf of resident shareholders. Franking credits have never been the property of anybody other than the shareholder. We cannot understand how, for people with the same asset base on the same pension, one can get a cash refund on franking credits and the other can't. This would be caused by the March 2018 cut-off date if Labor were to be elected. This is discrimination. Further, we cannot understand how industry funds and the not-for-profit organisations—for example, unions and charities—who do not pay tax, who have invested in equities that produce fully franked dividends are entitled to cash refunds. Yet we who are in pension phase will not receive a cash refund of franking credits if this policy is implemented. This is discrimination.

We believe the policy as proposed by Labor is wholly inequitable and discriminates against certain segments of the community. This is an attack on the elderly Australians who have helped build this nation to be what it is today. We in Australia talk about fairness. This policy is unfair and very Australian. Thank you, Mr Chairman and committee.

CHAIR: Mr Clayton.

Mr Clayton : I left school at the age of 16 and went home to the family farm and worked there. I was then called up for national service and I spent 12 months in Vietnam in an infantry battalion. After that period and since then, I have suffered health problems. I took over the farm from my parents and I paid them in cold, hard cash over a period of time to own the farm. At the age of 49 I was having such health problems that I was advised, and actually pushed, to cease work, and I ceased work at 49. I was one of the fortunate ones where I'd saved my dollars, therefore I had money in the farm. At that stage of the game, because of my health issues, I was also made a TPI. But I had the money from the farm. I bought a house in Perth. We also had some franking shares along that period of time, and we have built up. But at no time during my lifetime has anybody ever paid any superannuation on my behalf.

Later on, with John Howard and the situation that came there, we put our money into a self-managed superannuation fund. Why I did that was the simple fact that the opportunity was there; the government offered it; and two previous superannuation funds that I had put money into just vanished into thin air. I don't trust other superannuation funds. They change. I've shown that we can make more money out of our superannuation fund. We're getting a far better return than any of the industry funds and the others. My wife and I have managed them well. We need those super funds and we need those franking credits to continue with our life. I receive a payment from government which is a compensation payment for the health issues that I received and also a full gold card. I see so many people around that are not in my position. The other thing is that the money that self-funded retirees spend will turn over probably six times as it spins over and over and over and goes into the government coffers—a little bit of tax, 10 per cent here, 10 per cent there, continuously. I don't believe that the government is going to make a brass razoo out of imputation.

Mr Shaw : I sorry, I'm here under a misapprehension. I thought I could ask questions. However, I will just state that I'm a self-funded retiree. I've been self-employed for most of my life. We've done everything we can to see that we're self-funded all the way through. I receive no part-pension or anything like that. I just hope that I can continue to get my franked dividends.

Ms Hollingsworth : I'd like to concur with most of the comments that have been made already far more eloquently than I'm able to do, I'm sure. I would like to point out a few things. I am actually a borderline independent retiree. I worked until I was 67. My late husband and I were wage earners. We worked hard. I went back to work to give my two sons the opportunity to go to university, where my husband would have loved to go, because he was a very intelligent accountant, but because of the circumstances in his family life that wasn't a possibility. There weren't the funds there. We worked hard to give our children the opportunity of the university. I now have a son who's a consultant geologist and the other one is a business manager. We've been well rewarded for the effort that we put in there.

However, I'm very disappointed with the rewards that we are now receiving from the government and the comments that Bill Shorten has made: 'If you don't like us, if you don't like our policies, then don't vote for us.' Has he ever heard name 'Bill Hayden', I wonder?

My income currently is very low. I am actually entitled to a low-income card. That of course gives me no rewards financially. Basically, I'm living off the money that we saved, because my income at the moment is far less than what a pensioner earns. Is that the reward that you get for hard work in Australia?

CHAIR: Thank you, Ms Hollingsworth.

Mr Maddeford : Good morning, everyone. Thank you for the opportunity. I am a self-funded retiree and have taken complete personal responsibility for my financial affairs throughout my working life and now in retirement. I've never once had to call upon a government to contribute to my financial affairs.

My retirement strategy that I commenced less than three years ago relies upon the franking credit rebates to assist with living expenses in my retirement. Currently, the rebates represent 11 per cent of my annual expenditure and hence the potential loss of income is very significant to me. Should I lose this rebate, in the near future I will become eligible for a part pension and therefore cause an increase in the welfare expenditure by the government.

I do not believe it's fair or reasonable to remove a rebate as, if I was still working, I would still receive the rebate via a reduction in the tax payment amount. Furthermore, my long-term retirement strategy assumes I would continue to receive the franking credit rebate and I do not believe it is appropriate to shift the goalposts.

I observe the Labor Party has justified their proposed decision as many multimillionaires were receiving very large rebates. I agree that there is some social justice argument in relation to very, very rich people who are multimillionaires but believe there is no justice at all for the nonmillionaires like me, the part pensioners and most people in this audience this morning.

As you're aware, there are thousands of large companies operating in Australia who pay practically no, or even nil, corporate tax even though some have billions of dollars of revenue. These include many international companies who find it relatively easy to shift profits overseas. As such companies have been doing this successfully for decades, I suggest the only way to tax these companies is to introduce a corporate tax based on the gross revenue. This would ensure such large companies begin to pay an amount of corporate tax that is not unreasonable, is fair, equitable and long overdue. It would be relatively simple to collect, compared with the present situation and would generate billions of dollars of corporate tax every year. It would also mean that there'd be less need to effectively introduce an unfair and inequitable reduction in retirees' incomes. Thank you.

Mr Pritchard : I'd just like to say that we are north of 80, my wife and I. We stand to lose somewhere between 15 to 20 per cent of our income through this policy. That amount of money actually pays for our private health insurance, saving the government money. We've got other medical expenses, and we belong to a health fund because we want to stay fit in our latter years. So, we lose that money and we ask the question: why should we have these pressures at a time in our lives when financial stability is so important; and why does this cherrypicked policy make it acceptable for some self-managed super funds to receive cash benefits and allow other self-managed super funds to utilise benefits as tax offsets whilst we in the middle get well and truly shafted?

To those responsible for trying to put these proposals forward, we would ask them to please explain—explain the discrimination, explain continued government changes to self-funded retirement, and explain why they want to increase the number of those drawing the government pension by reducing an income stream so sacrificially put together over our working lives. Thank you.

CHAIR: Thank you very much, Mr Pritchard. Next I have Andrew King.

Mr King : I am also one of those who worked and saved hard in order to be independent in retirement. Our combined self-managed fund provides about $60,000. We are certainly not rich by today's standards. However, it means we can live with some dignity. Messieurs Shorten and Bowen intend to take about $14,000, in our case, away from us. This will leave us much worse off. The blatant unfairness of this tax is that it hits the lower super balances hardest—those under $1.6 million—while those with multimillions in super will be able to fully utilise their franking credits. We are also told that those retirees in industry and retail funds will not be affected by this tax. How fair is that? Is it constitutional, I ask. If this inequitable tax becomes law, many of us will turn away from franked dividends, which will be bad for Australian businesses. It will also mean that Shorten and company will not receive the windfall that they expect. Mr Shorten was quoted as saying 'frankly, I don't give a damn' when asked about the new tax. He also says he is 'not for turning', borrowed, I believe, from none other than Margaret Thatcher. Thank you.

CHAIR: Thank you, Mr King. Peter Cann.

Mr Cann : I've got a submission to table, but I won't go through it all, because it's just repeating. To remove the ability of people to claim excess imputation credits from the Australian Taxation Office is simply wrong. Our family has failed. Purely and simply, we believed in governments. We believe in you, the politicians that I'm looking at right now, who simply now can't be trusted. You can't be trusted because you continue to attack the weak and vulnerable. Remember back, it was Paul Keating, if I've got it right, who said: save your money for your future. What he really meant was: save your money so you politicians can take it. It's very, very good, isn't it.

As sad as it is, this tax is about an attack on self-funded retirees. If successful, it will be only the start of the politicians and the governments of all types looking at self-funded retirees. Retirees will be forced to hand over more cash as they eye off the spoils of their greed and their lack of leadership and understanding over many years, with the implied intention that it's all our fault and you should pay. For example, what about death duties next? What about an inheritance tax next? Oops! What about a tax on superannuation. Now you've opened the deal. Now this will be the thin edge of the wedge.

We feel we've failed as a family. You've caused us a great deal of angst and mental stress. I think it's not required. You could fix this in a simple way, and that is to grandfather the clause back to the last election date so that our planning, our belief right across the board—from financial consultants to governments and the whole lot, whom we believed—and our system of income would be supported by these rules. You've now taken it away from us, and I feel ashamed to think that I'm Australian.

CHAIR: Thank you very much, Mr Cann. This session goes into 11. It's 10.49. If anybody who has not had a chance to have their say wishes to do so, they can come to the front. I'm also mindful of the gentleman who was cut off before and wanted to speak longer. But, rightly, I do have to give preference to somebody if they haven't had a chance to say anything. The three minute rule will still apply.

Mr Shepherd : My wife and I have a self-managed super fund. We came over from the UK 21 years ago. In good faith, we took over my uncontracted pension, which is worth probably more than half of the super that we invested. We invested it through a retail fund. They're a con, quite honestly. So, in the middle 2000s, we set up a self-managed super fund on the basis of rules that were there and are still there. If that goes, then, like most of the other speakers, we lose about a quarter of our income. Things to go would be our health funds. Spending on GST items will have to be reduced and anything with excise. I'm a smoker—sorry, guys; I haven't heard of any of them—but you'll lose that excise. As for drinking, the tax on that will go. I'm sorry, it's pathetic. I know you guys are trying to argue against it, but it's pitiful for any government to propose it—and that you guys can't defend it.

CHAIR: Thank you very much, Mr Shepherd.

Name withheld : In 1987—it's just a little bit of history; I appreciate the three-minute limit, and if I could ask for a 30-second warning—the Keating government introduced the imputation system to prevent double taxation, where companies pay tax first on the underlying profits and then shareholders pay tax again on the cash amount of the dividends. The Howard government reformed that with refundable tax offsets so that it prevented over-taxation, whereby each shareholder would only pay tax on their share of the underlying profits at their personal marginal tax rate—you can get this from Wikipedia. Part of the design of the original imputation system was to make the form of business structure tax neutral. So it didn't matter if you were operating as a sole trader, in a partnership, through a trust or through a company; the end tax result was the same.

Not being a self-funded retiree but still being actively engaged in business, my questions are these, and they're sort of rhetorical questions which make the point. If I earn $50,000 of rent, and that's as a direct owner of the property—I'm not negatively gearing it—I pay my marginal rate of tax on that $50,000. If I happen to own a company, an investment in Westfield or just my private company, and distribute that profit to myself as a dividend, I pay a minimum of 30 per cent, or if I've got a small business turnover I think it's 27½ per cent now. So this is undermining the independence of the structure.

Consider a small-business man, an electrician or a carpenter. He's a sole trader. He's earning $50,000 a year. He's paying his marginal tax on that. He goes to his accountant and his accountant says, 'I think you should form a limited liability company to protect yourself from liability in the future against whatever legal claims might come up.' Whatever profit is left in that business is now going to be subject to a minimum 30 per cent tax, and he's not going to be able to get the benefit of the marginal tax rates. If that person reinvests in their business over time, when it eventually comes time to pay out those dividends to himself he's always going to be subject to this minimum corporate tax rate. It fundamentally changes the choice of business structure for small businesses, and it has far-reaching implications—

CHAIR: Here's your 30-second warning.

Name withheld : thank you—for small business, and I don't think this has been thought through at all. Thank you.

CHAIR: A clarifying question?

Mr CRAIG KELLY: Just to clarify: what you're saying is that your concern is that a small business that may be better off, for many reasons, incorporating may stay under a partnership or a sole trader structure because of this change?

Name withheld : Exactly. I can give a very simple example. Suppose I go into business with my nephew. The business makes a $20,000 profit. He gets $10,000; I get $10,000. That's his only income for that year, so he pays no tax on that. I, being his 'rich uncle', say, am on the highest marginal tax rate and I will pay 45c in the dollar, plus Medicare, on my $10,000 thousand. If we incorporate, then what's going to happen is that $20,000 profit in that company will be taxed at 27½ per cent. We will be paid half each. I think that's $7,250 each. I will still have to pay a bit of top-up tax, but my total tax on the $10,000 will be $4,500 and my nephew will be stuck with $7,250 rather than $10,000. So I just don't see how this is a form-neutral—

CHAIR: Thank you. You've made your point. Isn't tax fun! There's only four minutes left.

Name withheld : I'm a retired chartered accountant specialising in income tax. I agree with everything that's been said this morning, but I just want to share my views with the people. Most of us—I'm in the same category as the rest—will drop between 25 and 30 per cent in our income. Like most of us, we've planned our lives and I don't think that we could live on 25 or 30 per cent less in our income. So, what will happen? We will realise on our capital. We will sell shares. We will lose five to six per cent extra income by selling those shares. If you take a 10-year period, you could drop $300,000 or $400,000 in your income, compounded, quite easily. And, apart from the stress that the first couple of years will cause, there will be no overseas travel, which we strive to do, having worked 40 or 50 years of our lives. What I am concerned about is the realisation of corporate shares. They will go to the multi-rich again. The run-of-the-mill people here today will just keep losing money hand over fist, year after year, until they die.

CHAIR: We really only have three minutes. That will be the end.

Name withheld : I'm a financial planner. Everything that this audience has said today is absolutely correct. They've thought it through and it will affect them, obviously, in their back pocket. The question I have is: have Bill Shorten and Mr Bowen thought this through? I mean, they must know what they're doing, really, or don't they? So my question is: if this goes through, what is the Labor Party going to do with the $5 billion? What's going to happen? That's what I wanted to say.

CHAIR: That's a rhetorical question. There is one minute between these two gentlemen. You can have a minute each, but then we're closing.

Mr Galellis : The other gentleman asked a question about whether Chris Bowen knows what he's doing, and I would say no. I saw him on TV when he was justifying the retirement tax, saying that Aussies were 'overweight' on Australian shares. My wife and I invest in Australian shares because we want to support the Australian economy. We live here, our children live here, we want to support jobs, we want to support investment in this country. The idea that we'd be better off investing overseas is absolutely ridiculous. There's a whole range of reasons why we should not, and a lot of people have started to do so since this policy was announced. I'm afraid that a lot of them don't know what they're doing. I was born in Canada. I've got relatives in the US, Canada and the UK and I know the differences between the systems in those countries, and we are all different. When I first arrived in Australia it was a different culture here. The first meal I had was in a coffee shop in Grace Bros in Sydney. I was used to Europe and North America where tipping was the rule. In Sydney, when I walked out of the cafe, a middle-aged waitress chased me down the street and said, 'Mister, you forgot your change.'

CHAIR: Sorry, but that is your minute. I'm sorry, I'm not being rude. I've got to adhere to fair rules. Mr Foo Chang and then we're closing. You have a minute as well.

Mr Chang : Yes, Mr Chairman—one minute. Originally I came from Malaysia. I must contradict what the Labor Party say. They say, on the imputation credit system and the tax return, that Australia is the only country that has it, which is not true. Malaysia had that system long before us. Also, in Malaysia, whatever you put in savings—that means a fixed deposit account—the tax department doesn't want to know about the money you earn from that. It encourages saving in a country like that. So you can put as much as you want into your fixed deposit and they don't want to know about the interest you earn. This is just to show we are not the only ones, but we are quite far behind.

CHAIR: Thank you. We know this subject raises strong emotions and passions, and therefore it's welcome that people have been able to come and provide their testimony and inform our deliberations. Thank you for your attendance here today. Please note that written submissions will continue to be accepted throughout the inquiry. You can go to aph.gov.au/economics.

Committee adjourned at 11:02