Cashed-up retirees getting a refund for tax they never paid? We've hit peak rort
by Richard Denniss
[Originally published on The Guardian Australia, 20 Feb 2019]
It’s hard to believe that anyone who receives larges cheques from the government can call themselves a “self-funded” retiree, but hey, this is modern Australia and powerful groups get to call themselves whatever they want. Sure, the full age pension is only $23,823.80 per year for a single person and, sure, some wealthy retirees get cheques for “spare” dividend imputation credits worth far more than that – but if those cashed-up voters want to call themselves “self-funded”, Scott Morrison isn’t going to burst their (taxpayer funded) bubble.
The term “self-funded” retiree has become as ingrained, and meaningless, as the term “dole bludger”. Just how it came to be that all old rich people “worked hard and paid their taxes”, while all unemployed people are lazy and in need of tough love, has been lost in the mists of focus groups past. But the cynicism in the way we talk about those with the most and those with the least speaks volumes about modern Australia. The land of the “fair go” is long gone.
Most self-funded retirees have been receiving enormous amounts of other people’s money for a long time. Those with millions of dollars in superannuation have received hundreds of thousands of dollars worth of tax concessions over their lives. The most egregious was introduced by Peter Costello in 2007, when he made income from superannuation entirely tax-free. A wealthy Australian with a multimillion-dollar house and a million in superannuation can draw a pension of $100,000 per year and not pay a cent in tax. Someone working on the minimum wage of $37,398 per year pays more tax than a lot of our wealthiest superannuants.
Which brings me back to dividend imputation credits. Not many people understand dividend imputation for the simple reason that they are not rich enough to care about it. But once people do get rich enough to care, you better believe they pay attention.
Some of the wealthiest people in Australia pay negative tax. Whereas an Australian on a salary of $60,000 per year would pay income tax of $11,617, someone who inherited $1.2m worth of shares and received $60,000 per year in “fully franked dividends” would pay negative tax of $5,126 – they’d get money from the government. Work for a living and your take-home pay is $48,383 out of $60,000 before tax, but earn a passive income from franked dividends and your take-home pay is $65,126 out of $60,000 before tax.
Here’s how it works. Companies pay tax on their profits before they pay dividends to their shareholders. When the dividends arrive in the shareholders’ mail they come with “franking credits” which tell the shareholder (and the tax office) how much tax has already been paid on the profits.
We’re nearly there.
If the company paid 30% tax and the shareholder was in the 48% tax bracket then the shareholder would still need to pay an extra 18% tax on their dividends. But if the shareholder was in the 15% tax bracket then, because the company has already paid 30% tax, the shareholder is eligible for a refund of 15%. It’s a complicated system that most countries don’t bother with, but it makes some sense if you want to avoid “double taxation” ie companies and shareholders both paying tax on the same profits.
So far so good. But then Costello decided to punch a big, inequitable hole in our tax revenue bucket.
In 2001 Costello changed the law to give people who had more “dividend imputation credits” than they had income tax obligations, a cash refund for “spare dividend franking credits”.
Stick with me now, because things are about to get weird.
Usually to take advantage of a discount or a credit you have to buy the product. For example, while your local cafe might give you a “free coffee” after you earn 10 “coffee credits” on your loyalty card, try asking them to give you $5 instead.
But luckily for some of Australia’s wealthiest retirees, those rules don’t apply to our tax system. If you have lots of income from shares and no other source of “taxable income”, you pay negative tax – literally getting a refund for tax you never paid.
It gets worse.
In 2007, Costello declared that the money people aged over 60 pulled out of their (concessionally taxed) superannuation fund was not “taxable income”. And when you combine that with dividend imputation, we hit peak weird – or peak rort, depending on your perspective.
Imagine that you had $1.2m in superannuation and you were pulling out an annual income of $60,000 per year. Tax-free. Now imagine your aunt dies and leaves you her $1.2m in shares that pay fully franked dividends. You would now have two sources of income – tax-free super and negatively taxed dividends. In addition to your $120,000 per year you would also get a cheque from the ATO of $5,125. If your self-managed super fund has shares, you probably get another $5,000 to $25,000 worth of imputation credit refunds. And you get to call yourself “self-funded”!
And that, my friends, is why people other than you spend so much money on lawyers, accountants and financial advice. It’s also why Australia is one of the richest countries in the world but can no longer afford to ensure that pensioners in nursing homes get a decent feed.
According to modelling by the Australia Institute, cash refunds for spare dividend imputation credits cost the federal budget more than $5bn last year and more than half of those cash refunds will go to people with more than $180,000.
Both rorts are boring and technical, and the way they interact with each other is even more so. Which is why it has taken until 2019 for the fact that some of the wealthiest Australians pay negative tax and still call themselves self-funded retirees, to come under scrutiny. It’s obscene.
Richard Denniss is chief economist for the Australia Institute @RDNS_TAI. His new book, Dead Right: How Neoliberalism ate itself and what comes next, is out now.