News & Insights

The Australian: Investors awake to ALP retirement tax grab

The harmful consequences of a change of government are starting to dawn on investors and they’re already responding to protect those vulnerable to Labor’s high tax agenda.

This week Mirrabooka Investments announced it was bringing the payment of an end-of-financial-year special dividend forward six months to avoid the risk investors would be exposed to the introduction of Labor’s retirement tax.

The Labor tax would stop investors claiming back overpaid tax on their investment income through refundable franking credits in the same way workers are able to claim back overpaid PAYG tax from the tax office.

Mirrabooka said its decision was motivated by a possible Labor government and it would pay dividends early so “people will still be able to have that as part of their return and potentially a refundable credit”. Its decision should not surprise.

The House of Representatives’ Standing Committee on Economics is completing an inquiry into the consequences of Labor’s retirement tax.

At a November public hearing, Wilson Asset Management’s Geoff Wilson highlighted that as the policy would deny retirees from claiming back overpaid tax, they would be hit with an effective 30 per cent tax rate without any tax-free threshold.

Wilson concluded that “this policy unfairly taxes above the marginal income tax rate … [and] the government would selectively tax individuals at a greater rate than their marginal rate, undermining a central tenet of Australia’s progressive tax system”.

In its submission to the inquiry, Mirrabooka argued that “a tax rate of up to 30 per cent is being imposed on investors … [and] the individuals that will be impacted are those who do not have sufficient income to require them to pay tax”.

Put simply, Mirrabooka concluded Labor’s retirement tax would act as an “attack on lower-income earners”.

Similarly, an analysis by Plato Investment Management found the biggest nominal and percentage impact would be those who stood to lose nearly a third of their $30,000 income, with smaller losses as people moved up the income scale.

Considering the poverty line is assessed as 50 per cent of median household disposable income, the introduction of Bill Shorten’s retirement tax would push many retirees to the line and some over.

Disturbingly, the impact is most likely to be felt by women. Based on recent data, women retire with self-managed superannuation balances at about $511,000, compared to the male average of $641,000.

The consequence is that women are more dependent on claiming back overpaid tax to support their incomes in retirement and therefore disproportionately harmed by Shorten’s retirement tax.

As Mirrabooka has already done, many investors with access to financial advice have already begun the process of shifting strategies to limit their exposure.
Treasury modelling from last June found many investors were likely to respond to the incentives of the introduction of the retirement tax. It conservatively assumed a gap of at least $10 billion between Labor’s projected revenue and what was likely to be received.

The consequence will be that the claimed $56bn revenue for the retirement tax is never likely to eventuate to fund Labor’s election promises.
But not everyone is in a position to rearguard their investment strategy and could be caught in Labor’s net.

In their appearance to the inquiry the Australian Shareholders Association expressed specific concern about the likely impact on substantially older, vulnerable people.

CEO Judith Fox outlined that “when you’re in your 80s and 90s … it is simply not an easy matter to go out and restructure your financial affairs and try to find a third of your income somewhere else”.

At that stage of life, many retirees living off investments are conscious that they may need their capital as a bond to secure a place in aged care so they can see out the remaining years with security and dignity.

Labor’s primary response has been to dismiss the concerns and instead question whether it would be better if retirees invested less in Australian businesses.
Investors and financial advisers know the impact of a high-tax Shorten government and those who can are moving to limit Labor’s assault on their financial security through a new retirement tax that would deny retirees the capacity to claim back overpaid tax.

Tim Wilson is the chair of the House Economic Committee’s inquiry into the implications of removing refundable franking credits, and is the federal Liberal Member for Goldstein. This article was originally published in The Australian.