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Monday Message Board

March 12th, 2018

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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  1. Greg Pius
    March 13th, 2018 at 06:36 | #1

    The boss of Microsoft Australia Steven Worrall put Australia on notice yesterday about our workforce needs to be up skilled. Skilled talent, called human capital by economists, has never been in higher demand. But our governments are not funding the educational institutions that can increase the supply of these much sought after workers.

  2. Smith
    March 13th, 2018 at 12:44 | #2

    Labor’s plan to (in effect) increase the tax on super fund earnings is very …. courageous. The self-funded retirees will not be happy. Not in itself a problem politically for Labor, since they nearly all vote Liberal anyway, though it’s not hard to imagine a scare campaign that will bear little reality to what is actually being proposed, with a view to convincing every pensioner in the country that Bill Shorten plans to take all their money. But that’s politics.

  3. david
    March 13th, 2018 at 16:02 | #3

    Great battle in the in High Court tomorrow Justin Gleeson SC [respected lawyer ex Solicitor General] V Donoghue [Brandis’ substitute appointee] in the section 44 matter of Katy Gallagher.

    I have read the submissions for each of Katy and the AG and can see why Brandis “white-anted” Gleeson as he is a real lawyer, a very good one and clearly posed a threat to George and his politisation of the legal system.

    What a disgrace and not something we and Malcolm ” can move on from”.

  4. Ikonoclast
    March 14th, 2018 at 06:29 | #4

    @Smith

    Why should super be sacrosanct? I say that as a superannuant. The tax treatment of any income should be the same. There are far too many distortions in our tax system. They need to be removed.

    Old people get too many good deals while young people are being screwed by our system. I say that as an old person.

    “Never trust anyone over 30.” It’s kind of true in our capitalist system where people are mostly thoroughly corrupted or total sell-outs by age 30.

    QUOTATION: We have a saying in the movement that we don’t trust anybody over 30.
    ATTRIBUTION: JACK WEINBERG, twenty-four year old leader of the Free Speech Movement at the University of California, Berkeley, California, interview with San Francisco Chronicle reporter, c. 1965. Weinberg later said he did not actually believe the statement, but said it as a kind of taunt to a question asking if there were outside adults manipulating the organization.—The Washington Post, March 23, 1970, p. A1.

  5. Ernestine Gross
    March 14th, 2018 at 08:19 | #5

    @Smith

    Are you sure you are correctly representing the Labor proposal on reverting the dividend imputation system to its original policy setting?

    The original dividend imputation system ensured that tax on corporate profits are paid only once. If a beneficiary of a fully franked dividend payment had a marginal tax rate of say 49% and the corporate tax rate is 35% then this beneficiary had to pay only 14% on the dividend. If a beneficiary had a marginal tax rate of less than 35% (0% in the limit), then the beneficiary paid 0 tax on the dividend. The ATO kept the corporate tax. All this involved a crossing up of the franked dividend payment in the tax return filed by the beneficiary. This means, the dividend income reported in the tax return is $amount of dividend received + $amount of corporate tax paid on the dividend amount paid out by the corporation. Then the taxable income amount is calculated. Then the tax payable. In this calculation the franking amount on the dividend is subtracted (because this amount is ‘imputed’, taken as having been paid on your behalf by the corporation). Depending on the result, the beneficiary either has to pay a maximum of 14% (given the numbers in the example) on the dividend received, or nothing (if the marginal tax rate is equal to the corporate tax rate or less). This way the corporate profit is taxed only once and the marginal tax rate structure of the beneficiary is maintained.

    The Howard-Costello government changed this logically consistent original dividend imputation system to yet another tax avoidance opportunity. Their system, which is the current system, allows no corporate tax at all to be paid on franked dividend fraction of total profits because the ATO is obliged to pay the beneficiaries the corporate tax paid on the franked dividends, if the beneficiary’s taxable income is sufficiently small. (There are many ways even I can think of in which this can be achieved – borrowing features in many of them.)

    Superannuation funds have differnt taxation rules. The most important one I can think of is that the profits (‘returns on investment’) are taxed at a concessional rate, 15% from memory during the accumulation phase. That is, they don’t have the progressive marginal tax rate structure of individual beneficiaries (a tax concession for the middle and high income earners).

    So, how much would an age pensioner lose from the Labor proposal? Those without shares that come with fully franked dividends would lose $0. Those with say 700 IAG shares would lose in the range of [$50, $200] p. a., depending on the profit results, if they knew and followed the Costello policy change, otherwise $0. Such amounts do not impact on the actual living standards of the age pensioners.

    Perhaps one could have a survey of age pensioners with questions such as: Are you prepared to give up your cash refunds of corporate taxes paid on your dividends in exchange for the prospect of your children or grandchildren facing less competition in the housing market because other people can’t borrow to buy real estate to reduce their taxable income to qualify for the cash tax refund on dividend franking credits worth thousands of dollars?

    Is what I have written consistent with your post?

  6. Smith
    March 14th, 2018 at 09:22 | #6

    @Ernestine Gross

    Your detailed explanation is what I said in one line, that the effective tax on super will increase. I didn’t say it was bad policy, and I doubt that many people will affected much. How much will depend on how much super they’ve got and what the mix of franked dividends is in their super earnings.

    But you can be sure that everybody aged over 60 will be given the message that they will be affected. Of course the government’s political position is nonsensical since just last year they also increased the effective tax on super by introducing a limit of $1.6 million that anyone can have in a tax free pension phase account, as well as reducing the contribution limits. But when Labor does it it’s a “tax grab”, “the politics of envy”, “anti-growth”, blah blah blah.

  7. Smith
    March 14th, 2018 at 09:34 | #7

    @Ernestine Gross

    You mentioned Howard-Costello. The H-C imputation changes are one example among many of that government recklessly giving away money with bad tax policy that it seemingly could afford to do because it was awash with cash thanks to the mining boom. A genuinely fiscally conservative government would have put the money away in a serious future fund, as the Norwegians do, not the Mickey Mouse version H-C started, and it would have made the federal government finances strong for generations.

    It was a missed opportunity that comes along not once in a lifetime but once in a couple of hundred years. But that’s the past. Future governments will have to unpick all of the H-C tax changes.

  8. Ernestine Gross
    March 14th, 2018 at 11:17 | #8

    @Smith

    No, I didn’t say the equivalent of ‘the effective tax on super will increase’.

    I didn’t go into some detail because I want to promote the policy or because I assumed you are against it but rather because in my opinion it is exactly sentences such as ‘the effective tax on super will increase’ or similar generalisations, which may frighten those over 60. Detail does matter.

    I wonder how many age pensioners with a few hundred dollars fully franked dividends ever claimed the cash payment from the ATO.

  9. Smith
    March 14th, 2018 at 11:43 | #9

    @Ernestine Gross

    Of course it’s an effective increase in the tax on super. Tax revenue will increase because tax refunds will go down. It is absurd to argue otherwise. People whose sole or dominant source of super income is franked dividends will get nothing instead of a tax refund.

    Pensioners with a few hundreds fully franked dividends don’t need to claim anything. If they declare their dividend income on their tax return the tax office calculates the credit in their tax assessment. This might or might not lead to a cash refund. It depends on what else is going on such as whether they owe tax on interest income or whatever.

  10. Aardvark
    March 14th, 2018 at 13:19 | #10

    I’m assuming that the marginal impacts on self funded retirees is close to a zero sum gain. To the extent they are being provided cash payments for imputation credits implies they are not earning sufficient income for those credits to offset by a tax liability. Presumably the loss of income from the credits would then be at least partially offset through an increase in pension payments. Would be interesting to see a full and detailed analysis of the actual expected distribution impacts rather than the typical hyperbole.

  11. Smith
    March 14th, 2018 at 13:27 | #11

    @Aardvark

    Pension eligibility is determined by before-tax income, so losing the tax credits won’t give people a bigger pension.

  12. rog
    March 14th, 2018 at 15:45 | #12

    Stephen Hawkings death draws attention to his view on the US; while he liked the place and had many friends there post Trump he felt uncomfortable and ceased visiting. He professed to be mystified as to Trumps popularity – it’s a worry when such events cannot be explained by our greatest thinkers.

  13. Smith
    March 14th, 2018 at 16:19 | #13

    @rog

    The skills required to understand the physics of the universe are different from those required to understand people, especially where emotions, fears and prejudices are involved.

  14. Ernestine Gross
    March 15th, 2018 at 12:00 | #14

    @Smith

    You are ignoring details – like some newspaper commentators.

    Tax revenue will go up because corporate tax payments increase without increasing the corporate tax rate or the total corporate tax payments. Your argument has the quality of multinationals saying corporate taxation has increased because the ATO doesn’t allow them to shift profits to lower corporate tax juristictions.

  15. Ernestine Gross
    March 15th, 2018 at 12:08 | #15

    @rog

    I am sympathetic with your point. I interpret Hawkings’ observation as an indication that what is going on there is not reasonable. It cannot be understood by a reasoning mind. It is a worry.

  16. Smith
    March 15th, 2018 at 12:09 | #16

    @Ernestine Gross

    Under the Labor policy, corporate tax payments – the amount of tax paid by companies – will not go up by one cent.

    Income tax paid by shareholders in companies, including individual shareholders and super fund shareholders, will go up because on the whole they will be receive lower refunds.

    How how is this to understand?

  17. Collin Street
    March 15th, 2018 at 12:27 | #17

    Australian company tax falls on the shareholders, far more than on non-imputed systems. It’s the same as the entire burden of the GST falls on the end consumer.

    … a loss-making company won’t be able to claim franking credits for their profitable subsiduaries either, which has interesting impacts on trans-national tax minimisation

  18. rog
    March 15th, 2018 at 14:27 | #18

    According to the ATO – at June 2017

    the number of SMSFs increased to 596,516
    the number of SMSF members is 1,124,453
    the estimated value of SMSF assets is $696.7 billion
    the top five asset types held by SMSFs by value incl listed shares at 30%

    I think that Shorten has seriously misread the market. While his policy may be correct on principle, since the introduction of Simple Super the number of SMSFs has grown enormously.

    Overall the growth in superannuation was encouraged by govt as a means to reduce the future tax burden.

    Should Shorten win govt and implement his policy those SMSF members relying on dividends could see their income reduced by 42%. It will be seen as a policy backflip and I expect that the ALP will lose a lot of votes – this is a fight that they didn’t have to pick. They need to look at tax policy in its entirety and not cherry pick.

  19. Aardvark
    March 15th, 2018 at 15:51 | #19

    @Smith
    I would have assumed that the credits would be deemd to be income and form part of the income test for the pension. This is consistent with the following comment by Eslake:

    But Eslake says if people end up losing a modest income stream they might be eligible for a larger part pension, or a part pension for the first time, because they might meet the relevant income test.

    This suggests that those low income parties who would be effected by the policy change would have some of that impact offset by an increased pension payment.

  20. Ernestine Gross
    March 15th, 2018 at 15:53 | #20

    @Smith

    and rog,

    you both don’t understand dividend imputation and therefore you can’t see the tax loophole which Shorten’s proposal is to close. The tax loophole (created by the change to the original system) means that some company profit is not taxed at all. That is, the companies that do issue fully franked dividends pay their due tax but the ATO is then distributing some or all of it to individuals, retired or otherwise, or to companies. This surely is not the idea of dividend imputation.

    How do SMSF people in the retirement phase manage to live of dividends and still get the imputed tax credits refunded? They have to manage their financial affairs in such a way that their taxable income is so small that they cannot subtract the tax credit from the crossed-up dividends. There is obviously something not quite transparent.

    Superfunds do pay income tax, although at a reduced rate. This means the franked dividends enter their profit calculation via the crossed-up calculation as I have explained and then the franking credit is deducted from the taxable income. They still get the benefit of the difference between the corporate tax rate of fully franked dividends and their concessional rate.

    Today I met a friend, knowledgeable in economics and finance, who owns and operates his own IT business. He told me how some people have complained to him about the proposal in the same way you two do. His short answer was the proverbial Murdochs of this world won’t like it.

  21. rog
    March 15th, 2018 at 16:05 | #21

    @Ernestine Gross I do understand dividend imputation. As I said, Shorten might be correct on principle but wrong on practice – the system has been in use for 18 years and people, dare say a lot of people, would see this as a betrayal and vote accordingly.

  22. rog
    March 15th, 2018 at 16:11 | #22

    @Ernestine Gross “How do SMSF people in the retirement phase manage to live of dividends and still get the imputed tax credits refunded? They have to manage their financial affairs in such a way that their taxable income is so small that they cannot subtract the tax credit from the crossed-up dividends. There is obviously something not quite transparent.”

    Once a person in a SMSF has retired (pension phase) they receive a pension from the SMSF which is not taxed – therefore their taxable income is $0. Much the same as govt welfare is not taxable.

  23. rog
    March 15th, 2018 at 16:15 | #23

    @Ernestine Gross “Superfunds do pay income tax, although at a reduced rate”

    SMSFs are taxed on concessional contributions only, non concessional contributions and earnings on investments are not taxed.

  24. Smith
    March 15th, 2018 at 16:28 | #24

    @Ernestine Gross

    For the final time, tax paid = tax paid at source plus tax owed after the annual tax assessment by the ATO. Tax owed could be negative, in which case taxpayers get a refund.

    Under the current system, tax payers, especially super funds whose tax rate is 15% in the accumulation phase or 0% in the pension phase, get a refund on the excess franking credits. Under the Labor proposal, they won’t get a refund on the excess franking credits. Therefore, they will pay more tax. This is not rocket science. As you say, the proverbial Murdochs won’t like it. Why won’t they like it? Because they will pay more tax. It’s the whole point of the policy.

  25. Ernestine Gross
    March 15th, 2018 at 17:03 | #25

    @Smith

    So, you agree with those who don’t pay tax and complain that under the proposed re-introduction of the dividend imputation system they don’t get a cash payment from the ATO on the grounds that they now pay more tax. Honestly, Smith.

  26. Smith
    March 15th, 2018 at 17:11 | #26

    @Ernestine Gross

    Yes, that is exactly what will happen. At the aggregate level, when the government gets more tax revenue, it means some people are paying more tax. At the individual level, if you get a smaller tax refund, it means you are paying more tax. I didn’t say it was bad policy.

  27. ChrisH
    March 15th, 2018 at 18:52 | #27

    Rog (at #22), government welfare is generally taxable. It has been so for many years, and in nearly every category. And superannuation is taxable if it comes from a non-contributory fund.

  28. rog
  29. rog
  30. Ernestine Gross
    March 16th, 2018 at 12:59 | #30

    @Collin Street

    Indeed.

    @Smith

    Your mental model is too coarse; you do not distinguish between a tax payment by somebody and a welfare payment (ie a tax expenditure in JQ’s and others’ useful terminology). The distinction between a welfare payment and a tax incentive is also a delicate one.

  31. ChrisH
    March 16th, 2018 at 13:07 | #31

    ‘The Princess Bride’. That guide does not say what you seem to think it says. It identifies the possibility of exempt income, and mentions some things. But it does not assert that all, or most, government income support is exempt. Neither does it assert that all, or most, support for students is exempt. That is because most income support, and most student support, is taxable and has been so for quite a few years.

    ‘Certain’ pensions, and ‘certain’ payments, is not an assertion of all – or of most.

  32. rog
    March 16th, 2018 at 16:03 | #32

    I guess, or maybe hope, that by the next election all the heat will have gone out of the argument allowing reason to prevail.

    Certainly the ALP have signalled that they will form a govt that are willing to make hard decisions for the greater good, which would make for a break from the govt-byinternal-polling over the last few decades.

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