Labor appears poised to exempt both full and part pensioners from its plan to end cash rebates for excess imputation credits, with the shift expected to be considered by the shadow cabinet on Monday.
Party sources have confirmed the full exemption is in play as the opposition seeks to shield its core supporters from the impact of a policy shift that will return more than $11bn to the budget over two years, and $59bn over the forward estimates, if the ALP wins the next federal election.
With federal parliament resuming on Monday, Malcolm Turnbull jumped on reports of a shift, branding it “policy on the run”.
Labor has indicated that 200,000 part pensioners and 14,000 full pensioners will be impacted by the change. The government has released figures indicating 237,952 pensioners will be hit.
The ALP’s proposal would abolish franking credit cash rebates for retiree investors – a system introduced by the Howard government in 2000, which now costs the budget $6bn a year.
When companies pay dividends to Australian shareholders out of after-tax profit, shareholders receive franking credits, a credit against their own tax bill based on the tax paid by the company. This system, which is known as"dividend imputation", is unusual – only four other countries in the world use it.
However, in 2000 the then treasurer, Peter Costello, made the system even more generous to shareholders by allowing them to claim a cash refund if they received more in franking credits than they owed in tax. Because income from superannuation is tax free for people over 60, high-income retirees can use franking credits to get a cash "refund" of more than 40 cents for every dollar they receive in dividends.
The cash payments cost the budget $550m the first year they were paid. The ATO estimates that the measure cost $4.6bn in 2012-13, and Labor claims that abolishing the payments from 2019 will save $8bn a year.
The policy has been blasted by seniors groups and by the self-managed superannuation funds industry, but it has been defended by a number of economists on the basis that current arrangements are fiscally unsustainable.
Independent economists including Saul Eslake and researchers from the Grattan Institute have branded the attacks on the policy by interest groups and the Turnbull government as deeply misleading.
Brendan Coates and Danielle Wood from the Grattan Institute argued in an analysis published by Inside Story that some low-income retirees could be negatively affected by Labor’s proposal but they say the bulk of the impact will be felt by wealthier seniors.
“The government claims that 54% of people affected by Labor’s policy – some 610,000 individuals – have taxable incomes of less than $18,200,” Coates and Wood say. “And it says that 86% of the value of all franking credits refunded are received by those with taxable incomes of less than $87,000 a year.
“These claims are deeply misleading. Taxable income ignores the largest source of income for many wealthier retirees: tax-free superannuation.”
