Labor tax plan could cut 9% off retiree savings

Retirees could lose the equivalent of 9 per cent in super savings under proposed Labor reforms.

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The Labor Party’s proposal to cut cash refunds paid to retirees would effectively reduce the spending power of retirees by as much as 6 per cent over the course of their retirement, according to a report by the Australian National University.

“It’s a pretty hot button issue amongst retirees at the moment,” researcher and associate professor Geoff Warren said.

Currently, investors who pay no income tax, like retirees, receive cash refunds instead of tax credits on their investments. This is to avoid the double payment of tax, first by the corporation and then by the individual investor.

Noting this, Warren said, “By buying Australian shares that are fully franked people actually end up with a real kicker to their investment return.”

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However, under the Labor policy the payment of cash refunds would be abolished.

According to the ANU researchers, associate professors Warren and Adam Butt, and Dr Gaurav Khemka, this will trigger an income loss equivalent to a 9 per cent reduction in superannuation savings.

“It’s a pretty large number, so threatening to take it away is quite significant for some,” Warren said.

However, the value to retirees comes at a cost to the Australian economy.

Announcing the policy in March, Labor leader, Bill Shorten and Shadow Treasurer Chris Bowen said limiting cash refunds would free up $10.7 billion over the federal budget’s forward estimates.

Introduced under Prime Minister Paul Keating, Australia’s franking credit regime was amended by the Howard government to allow individuals and super funds to receive a cash refund rather than a tax credit, in instances where they weren’t paying tax.

Bowen claimed some self-funded retirees were receiving refunds of more than $2.5 million a year.

Noting the history of the policy, the researchers described the reversal as a threatening development.

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They also noted that as it stands, a retiree with $100,000 at retirement will receive on average $30,000 in cash refunds over the course of their retirement, and a retiree with $500,000 will receive around $80,000.

“While this may seem relatively ‘expensive’, it also offers social benefits,” the researchers emphasised.

“First, it either raises potential consumption during retirement at a given balance, or alternatively
reduces the amount needed to be placed into superannuation during the working phase thus increasing potential consumption prior to retirement.”

Speaking at a media briefing this week, fund manager Stephen Hiscock from SG Hiscock said SMSFs in particular will be “significantly concerned” by Labor’s policy.

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While full and part-pensioners are exempt from the touted reform, self-funded retirees who don’t claim the pension won’t be.

“If they remove it [the policy], it’s going to be very difficult for retirees to generate the same income,” SG Hiscock portfolio manager, Hamish Tadgell added.