New dividend rule will hurt where it shouldn’t
BILL Shorten's announcement of Labor's proposed changes to the dividend system has been variously discussed as anything between a big gamble or a very wrong turn in economic policy.
It's proven a concerning revelation for many seniors who have tried to develop a retirement savings plan that is compliant with shifting superannuation rules, but still funds what they consider a reasonable standard of living.
These concerns have been repeated ad nauseum since last week's announcement of the policy to cancel cash refunds for excess dividend imputation credits.
It highlights, yet again, that the hit on retirement incomes contained in this proposal will not only affect the very wealthy, but substantially damage the lifestyles of many retirees who have prudently saved and are carefully drawing down on their retirement savings.
What must be remembered in all this is that refundable franking credits have been a well-established principle for nearly two decades, having been introduced on July 1, 2000 and people have understandably built their retirement income strategies around this.
All these people want is certainty with the superannuation system. They had to contend with the enormous changes that took effect on July 1, 2017 and Labor's proposal will force them to rethink their retirement income strategies - yet again.
Labor is saying about 200,000 people will be affected by this proposal. We would dispute this number saying it has the potential to hurt more than one million Australians.
Our calculations show it will cut about $5000 of income from the median SMSF retiree earning about $50,000 a year in pension income. For people heavily weighted towards fully franked shares, the effect will be even more disastrous. For Labor to say some people won't be paying any more tax is just semantics.
The simple fact is this proposal unfairly targets one sector of the community who have been diligent in saving to be self-sufficient in retirement.
SMSFs put strategies in place under the existing rules only to find that politicians have again proposed to shift the goal posts.
Aside from the personal financial pain many retirees will suffer, we would contend that the changes to dividend imputation could have unforeseen consequences. It's almost inevitable to lead to a shift in SMSF asset allocation.
As Labor has mentioned, investors could look to property investments as an alternative, but it could also force SMSF members into riskier asset classes as they chase higher yields. An obvious example would be shifting their equity investments from domestic to overseas stocks as the former become less attractive on an after-tax basis. Although overseas investment does bring with it the benefits of diversification, is also introduces new risks to an SMSF, such as foreign exchange risk.
When compulsory superannuation was introduced in 1992, the primary goal was for people to save to become more self-sufficient in retirement. Financial incentives were put in place to ensure this happened, and people, taking the government at its word, structured their financial affairs to this end.
But if Labor's proposal to dramatically rewrite the rule book lands on the statute books, it will turn their financial world upside down. They deserve better.
John Maroney is chief executive of Self Managed Super Fund Association.