Junk Explained: Here’s How Rich Boomers Are Using An Extremely Sneaky Scheme To Steal Your Money
The details might sound boring but you really need to know about this one.
Guess what, everyone? Australian politics has finally moved past rolling citizenship drama and parliamentary sex and entitlements scandals to get back to some good ol’ fashioned, meaty policy debates. At least for now.
We’re pivoting to economic policy, baby. But please, keep reading.
This week Labor leader Bill Shorten announced that, if Labor were to win the next federal election, he would scrap cash refunds for franking credits associated with the dividend imputation scheme.
What the fuck does that mean? Yeah, fair question. The policy itself sounds extremely dry and boring… because it is. But it will also raise nearly $12 billion in revenue from some of the wealthiest Australians, including wealthy retirees. That’s money that could be spent on education, health, affordable housing, and all sorts of other good things.
Even though words like “franking credits” and “dividend imputation” sound boring as hell, it’s worth paying attention to this one because it’s likely going to lead to a big political showdown between the big end of town and everyone else.
Franking My Dear, I Don’t Give A Damn
Ok, time to fess up. Like the rest of you, I had no idea how dividend imputation or franking credits worked. But I figured I owed it myself to learn about this important policy measure to broaden my general knowledge in case it came up at this week’s pub trivia. Also, it’s my job.
The first thing I did was ask my boss. Turns out he also had NFI.
“It involves shares…? And a dividend is what you get paid when the value… of your shares…? I think I get dividends from the Commonwealth Bank? And an imputation is when you say something mean?” he answered extremely apprehensively.
The next idea I had was to ask my housemate, who works at an investment bank. I don’t really understand what investment bankers do, but it’s a safe assumption that it has something to do with investing. And since I knew dividend imputations had something to do with shares, which are a kind of investment, I thought I was onto something.
I messaged him to ask what dividend imputation was, and whether it was good.
“Hey mate yes it’s great,” he replied. “Basically means company profits don’t get taxed twice after it’s paid out in dividends to shareholders.”
The fact that an investment banker thought dividend imputation was good immediately set off alarm bells for me, so I asked him more questions about how exactly it worked. Unfortunately he was on a plane to Perth and the plane wasn’t taxiing long enough for a finance masterclass, but I think I got the basics.
Here’s how it works:
Step 1: You buy some shares in a company.
Step 2: The company makes a profit, great (all profit is theft, down with the bosses).
Step 3: The company pays the government tax (unless it’s one of the many, many corporations that don’t pay tax).
Step 4: As a shareholder you earn a dividend, which is basically a fraction of that profit.
With me so far? Good, because that’s the easy stuff. Here’s where things get a bit more complicated:
Since that dividend is essentially income, you would normally have to pay tax on it — just like you pay tax on your salary.
But! Because that dividend is coming out of company profit, which has already been taxed by the government, something called dividend imputation kicks in to avoid tax being paid twice on what is essentially the same bucket of money.
Which brings us to…
Step 5: You get a franking credit. A franking credit is kind of an “I owe you” from the government that acknowledges this extra income you just got has already been taxed. You can trade it in at tax time for a reduction in your tax liability. Why are they called franking credits? Who is Frank? Fucked if I know.
This system has been around since Paul Keating introduced it in the 1980s. And it isn’t that objectionable. But in 2000 former treasurer Peter Costello made one big change that turned dividend imputation into what some people (me) would describe as a massive scam.
Rich Old People Are Ripping Us Off
To fully realise the problem with Costello’s reforms, it’s helpful to first understand who benefits the most from dividend imputation. Obviously everyone who owns shares and gets a dividend gets some sort of tax benefit, but for most people it isn’t going to be a huge amount of money.
Modelling done by the Australia Institute found that 75 percent of the benefit that comes from dividend imputation goes to richest 10 percent of households. A big proportion of those who benefit from the scheme are wealthy retirees who manage their own super funds.
Now retirees living off their super investments don’t actually pay any tax. So how can they use franking credits to reduce their tax liability if it’s already zero? Here’s where Costello stepped in. Instead of just using franking credits to reduce the amount of tax you owed to the government, he changed the law to allow people to actually cash in their credits for real money.
So not only are investors able to minimise their tax, they actually get given extra money from the government, even if they’d paid absolutely no tax that year.
In the space of one day I’ve gone from not knowing about dividend imputation to being extremely outraged at the fact the government is showering rich retirees with money. It seems a bit cooked to me, and it turns out Bill Shorten agrees.
What Does Labor Want To Do?
Labor wants to keep most of the dividend imputation scheme intact, but scrap the bit that allows for cash refunds. So if you’re an investor and you receive a franking credit, you can still use that to minimise your tax liability. But you can no longer trade that credit in for a cash refund.
According to Shorten that reform will raise nearly $12 billion over the next four years from “a very small number of shareholders”.
According to treasurer Scott Morrison: “Bill Shorten is reaching his hand into pockets [of pensioners] and ripping out the cash”.
David Richardson, a Senior Research Fellow at the Australia Institute, told Junkee that Morrison’s argument is just a “scare campaign”.
“The overwhelming issue is rich people who set up self managed super funds,” he said.
To illustrate how wealthy someone has to be to benefit from the current arrangement Richardson gave the example of a retiree living entirely off dividends.
“If you have shares in the Commonwealth Bank they’re paying 5.6 percent in dividends,” he explained. “To get $50,000 a year out of them you’d have to hold almost a million dollars worth of shares”.
That’s a lot of shares.
He also pointed out that there are only four other countries in the world that that have a similar arrangement to Australia’s.
This Seems… Unfair?
I’m just gonna go out there and say it: I’m not a massive fan of this scheme that sees the government pay cash bonuses to rich retirees. While we’re forking out billions on this scheme our public schools, universities, hospitals and welfare services remain underfunded.
The details of how dividend imputation work are pretty complex and boring. But it also involves an enormous amount of money, so it’s worth getting across the details because if you don’t… boomers are going to keep stealing your money.