A PUBLIC HEARING hearing will be held in Melbourne next week by the House Economics Committee as it conducts an inquiry into the implications of removing refundable franking credits - an inquiry that has been welcomed by the Institute of Public Accountants (IPA).

“This inquiry will heighten community understanding of a well-established feature of our taxation system,” IPA chief executive officer, Andrew Conway said.

“The Labor Party is proposing to change the rules to remove the ability for individuals and superannuation funds to claim their full entitlement to franking credits.

“The inquiry will highlight the significant implications attached to any change in government policy on refunding imputation credits.

“If we were designing a new tax system today, you would most likely not have full imputation where the taxation is assessed in the hands of the recipient and any excess franking credits are refunded. 

“In today’s economic circumstances it would be difficult to justify from a fiscal sustainability perspective.

“However, the refunding of imputation credit policy has been in operation for close to two decades and removing it in a piecemeal way without dealing with the consequences is fraught with danger.

“The case for removing dividend imputation is not strong and any tinkering needs to be assessed against some alternative benchmark tax system such as removing dividend imputation entirely and replacing it with a discounted tax rate.

“More importantly we need to be looking at how we tax all forms of savings more consistently. A more holistic approach to taxing personal savings across all asset classes as recommended by the Henry Review would be more beneficial than changing one aspect in isolation.

“We do not support any changes in the removal of refundable franking credits unless it is associated with more holistic tax changes to the treatment of savings more broadly.  A survey of our members also shows that 95 percent of respondents do not support any change,” said Mr Conway.

The IPA will be appearing before the inquiry next week.

www.publicaccountants.org.au

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THE Defence Sub-Committee of the Parliament’s Joint Standing Committee on Foreign Affairs, Defence and Trade is holding a public hearing in Canberra on Friday November 16 for its inquiry into transition from the ADF.

Members of the Defence Sub-Committee will hear from individuals and representatives of Ex Service Organisations and Mental Health Researchers on the efficacy of support services available to members of the ADF transitioning out of active service, particularly focussing on mental health care, employment pathways and the role of Ex-Service Organisations (ESOs).

Representatives of the Department of Defence and Veteran’s Affairs will also give evidence.

Public Hearing details:  8.45am to 12.30pm, Friday 16 November 2018, Committee Room 1R3, Parliament House, Canberra

The full program for Friday’s hearing is available from the committee’s website.

This hearing will be streamed live at aph.gov.au/live.

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A SURVEY of large super funds by the Financial Services Council (FSC) has found it is likely that the largest group of people benefiting from franking credit refunds are ordinary Australians who are members of large super funds.

The number of Australian beneficiaries is significantly larger than the number of individuals and Self- Managed Super Funds (SMSFs) who also benefit from refunds. The FSC has expressed its support for refunds of franking credits in a submission released today.

The submission to the House of Representatives Economics Committee reveals that these franking credit refunds benefited up to 2.6 million members of large super funds in 2015–16 and up to 3.5 million members in 2014–15.

While refunds provide a smaller average benefit for individuals in large super funds than for SMSFs, the FSC survey shows the impact on some members could be significant; over a lifetime the benefit of refunds could add up to a considerable figure, up to $55,000 at retirement.

Refunds of franking credits mean an Australian investor in local shares pays the same overall tax as an investor into other Australian assets including bonds, term deposits, property and infrastructure. If refunds are restricted then some low-income earners, retirees and super funds will face a tax penalty if they invest in shares.

The FSC survey of 14 retail super funds found:

• Many super fund members with low balances benefit from refunds. Four surveyed funds had an average balance below $100,000; there were 73,000 accounts in these funds and refunds increased returns to all fund members on average by 0.26% per year.
• There were also 33,000 surveyed super accounts where the average benefit of refunds was more than 0.3 percent per year across all fund members. As an illustration, an increase in superannuation returns of 0.3 percent per year over a working life would increase retirement savings for a typical full-time worker by about $55,000, based on Productivity Commission methodology.
• There were 66,000 retiree accounts in the surveyed funds; if the retirees received the benefit of the refunds then the average benefit per retiree was $850 per year.

Refunds also provide a significant benefit to small APRA regulated funds, of many thousands of dollars per year on average, increasing average returns by up to 4.2 percent per year. In addition, over $100 billion invested in managed funds outside of super receive significant benefits from refunds.

FSC CEO Sally Loane said, "The FSC considers that franking credit refunds should continue. They provide substantial support to the retirement savings of millions of Australians — including many with fairly modest savings.

"Constant tinkering with the rules on retirement savings and superannuation, and hitting retirees hardest, will only erode confidence in the system, leaving more Australians reliant on the age pension.

"The FSC supports a moratorium on adverse changes to the superannuation system, including changes to franking credit refunds. A more stable superannuation system will encourage engagement and confidence in the system and increase self-reliance in retirement. If policy makers keep moving the goal posts Australians will disengage with the super system and stop contributing more to their superannuation."

About the FSC survey

The survey covers 14 Australian retail superannuation funds, with 305,000 member accounts in total. The average franking credit refund was $4.7m per fund.

About the Financial Services Council

The FSC is a leading peak body which sets mandatory Standards and develops policy for more than 100 member companies in Australia’s largest industry sector, financial services. FSC's Full Members represent Australia’s retail and wholesale funds management businesses, superannuation funds, life insurers, financial advisory networks and licensed trustee companies. FSC Supporting Members represent the professional services firms such as ICT, consulting, accounting, legal, recruitment, actuarial and research houses. The financial services industry is responsible for investing almost $3 trillion on behalf of more than 14.8 million Australians. The pool of funds under management is larger than Australia’s GDP and the capitalisation of the Australian Securities Exchange, and is the fourth largest pool of managed funds in the world.

www.fsc.org.au

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DESPITE Labor Party claims their proposed changes to negative gearing and capital gains tax will not affect existing investors, as the changes will be grandfathered, research house RiskWise says this is simply not the case.

RiskWise CEO Doron Peleg said the proposed changes would create two types of property markets - primary and secondary markets - which would significantly impact dwelling prices. This is because when an existing property is sold, the buyer would not be able to enjoy the current taxation benefits, and thus, would be willing to pay less, i.e. the fair market value of the property would be lower.

The ALP has proposed limiting negative gearing to new housing and reducing the discount on capital gains tax from the current 50 percent to 25 percent.

However, they state all investments made before the changes would be grandfathered in full, meaning taxpayers would continue to be able to deduct net rental losses against their wage income, providing the losses came from newly constructed housing.

“This sounds good on paper, but the changes will effectively create a primary market, comprising new properties and existing investment properties that qualify for negative gearing tax concessions, and a secondary market, comprising all second-hand dwellings that are sold following the changes, that do not qualify for these benefits,” Mr Peleg said.

“This will have a significant impact on both buying and selling decisions by property investors with a flow-on effect to dwelling prices.”

He cited a simple example of an existing investor with a negatively geared unit, in a saturated rental market, worth $500,000. The unit is not suitable for families so could only be used as a rental, as there would be little demand from owner-occupiers.

“For simplicity, let's assume you are currently an investor with an income that is similar to the median salary in Australia, and in the current market you would expect the overall taxation benefits from the negative gearing and capital gains tax to be $60,000,” he said.

“Now let’s assume the proposed changes take place, which means you can still enjoy the benefits of negative gearing as you are the primary investor, however, if now you want to sell to another investor, that investor will need to assess how much he or she is willing to pay given they will not be able to claim negative gearing against their wages and only receive 25 percent capital gains tax discount.

“So, if the capital gains tax discount only amounts to say $10,000, it means that the potential buyer/ new investor, will not be able to enjoy $50,000 of the $60,000 that the primary investor did. This means the secondary investor will have significantly lower financial benefits and therefore he will want to pay much less for the property. It’s as simple as that.

“And the same principle will be applied on a property valuation for re-finance purposes. The valuer should assess the fair market value of a property, assuming it is sold, and obviously, in that example, the valuation will be significantly lower if the taxation changes are implemented.”

Mr Peleg said re-finance could also become a major issue. This is because many interest-only loans were maturing and many investors were looking to re-finance with another lender. However, this lender would require a new valuation, and a lower valuation might not enable the investor to do so.

“You can compare it to buying a new car where the dealership might give you five years’ free service, five years’ warranty and free roadside assistance services. But if you sell the car to another private owner, they will not be able to take advantage of any of those benefits - no warranty, no free service and no free roadside assistance,” he said.

Mr Peleg said investors did not want to buy depreciating assets and this would have a direct impact on buyers if the changes to negative gearing and capital gains tax were implemented.

He said by grandfathering the changes, the property investor could still enjoy the taxation benefits, and only lost them when they sold, “and he will obviously get a lower valuation, if he needs to refinance”.

“In other words, if they don’t want to lose the benefits, they have to hold on to the property until the market adjusts and a potential buyer will see it as a positively geared property, something that could take many years,” he said.  

“This is a key reason for investors, even now, to sit on their hands and to wait for the implementation of these taxation changes and only then to reassess the market and to buy for lower prices - and we are already seeing the effect of these potential taxation changes, with accelerating price reductions.

“This is because the probability of a Labor win at the next election, to be held by May 18, 2019, is around 80 percent.

“In addition, auction clearance rates are the lowest they have been for many years, with Sydney recently recording the worst preliminary results in a decade.”

www.riskwiseproperty.com.au

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