Game Theory: why Labor can not budget for $5b from franking policy

Game Theory assumes players are rational and play the best game.

1. SMSFs can transfer into industry funds
2. Self funded retirees can sell down to receive a pension
3. Restructure into lower yielding equities and selling to fund expenses
4. Funds can restructure to pay unfranked dividends

Every Australian can act rationally to improve their position to counteract this policy and increase costs to the government and/or impact investment in Australian companies.

If Labor wins this election and legislates this policy then they must be held accountable to provide evidence of Its outcome.

I believe this policy if implemented will have a negative impact on Australia.

 

People behaving rational is the big question mark.

1. I'm not saying a SMSF isn't a rational choice for a sophisticated investor but its not a rational choice for a lot of people. I've seen people take a big hit on their super by bad decisions. I'm reasonably sophisticated . . . but I still think letting the experts in my industry fund manage my money is well worth it.
2, If they sell down they have to spend the money so that will help the economy by creating a demand.
3. Selling to fund expenses is a saving to the government compared with the government paying retirees to fund their expenses.
4. But are they going to get a pension if they restructure?

I get tired of people saying they are self funded retirees when the truth is they are getting tens of thousands of dollars cash from the government.

 

That's simply not true. They could

a) save the cash
b) buy an ip
c) invest using a different structure

 

Only if it's new if the want the depreciation allowances but they want to be investing for income to replace the income from dividends.

 

Selling up and incurring CGT and transaction costs may be a dampener?

 

I agree in that with a change in rules it is those who are agile that will be able to take advantage of opportunities.

This is the problem with ideological policies. In theory they works but that isn't how reality transpires because people can find ways to change and adapt. The old example of regulating increased wages payable by business to workers is great in theory, but the money needs to come from somewhere. Often it can mean the business (say if in manufacturing) who can't just put prices up to absorb the drop in margin may look to moving production offshore where there is a significantly lower cost base.

 

If in pension mode, zero CGT.

 

If people were rational, then John Howard would never have turned this offset into a refund and put us into this unaffordable (structural deficit) mess that we have now.

 

Thanks @willy1111

Still a few years away for me to be in that mode

 

Futlle to berate previoius Governments. If a problem exists now as a result of past decisions, the issue is how to fix it with the least disruption - and how it is sold to the electorate.

 

Whether the refund of franking credits was over-generous or not is irrelevant, it was legal and therefore people took it into account in their retirement income planning.

If/when the “rules” change, people will change their attitude to share holdings for retirement income.

The govt savings will be greatest in the short term, and isn’t that all politicians think about these days?

It will take time for the effect to wash through. Some won’t bother. I get good returns from my shares and the $1K or so refund I lose won’t mean I sell. (No cgt involved).

The beauty of shares is that their disposal can be staged to eliminate CGT if done in times of low or nil income, especially in the early years of retirement when proceeds can still be added to superannuation.

Anyone who is now relying on the franking refunds for living expenses will simply use up their capital more quickly, and qualify for pension assistance sooner.
Marg

 

Good luck selling that. Too many retirees (growing population too! so it's only going to snow ball and put the weight of financing government on the young) and investors hooked on paying reduced taxes.

For me, I would like to see CGT treated the same as any other income and retirees taxed at the same rate as the rest of the population as part of progressive taxation system (infinite rather than staggered...similar to Germany). Put taxes on all services and food products and then consider decreasing taxes on income.

Hell I would like to see inheritance tax put in to restrict inter-generational wealth transfer - earn your own financial well being not get a hand me out from your relatives.

 

He should have also set up a Sovereign Fund during his boom years when money was pouring in from resources ... which would mean were weren't in the structural deficit mess we are in now.

Liberals are very good at penny pinching - in hindsight they are terrible at money management

 

Great point .

 

If people were rational, our first Australians would have been granted the right to vote in 1901, not 60+ years later (in 1962 by the Liberals)

 

In a few hours time it will be all over..

 

Credit were credits due

From Hansard

The then Shadow Treasurer, the Hon Simon Crean, MP, stated:

Although imputation credits can be used to reduce an individual's or a superannuation fund's income tax liability to nil, excess credits were of no value to taxpayers. This bill proposes to refund to taxpayers any excess imputation of credits that may be left after offsetting the credits against their income tax liability.

The classic example of such a situation is a low-income person who earns a little investment income—for example, a full rate age pensioner. They face no income tax liability on their income and therefore cannot obtain the benefit of the excess franking credits attached to the small amount of dividend income they receive.

Under this proposal, they will obtain a refund of their income tax from the Taxation Office, representing the excess imputation credits. Labor included this proposal in our taxation policy prior to the last election.

Therefore, we have no difficulty supporting the proposal because it is our policy. It builds on the major reform accomplished by Labor almost 15 years ago and it improves the current taxation situation faced by low income investors, especially retired Australians.

 

Future Fund | Home

 

They did.

Check out “Future Fund”. Originally (mid 2000s) designed to pay for the previously unfunded federal public servants’ superannuation, then expanded. Started by Howard/Costello.

Presently around $150 billion.

Unfortunately subsequent governments have raided it from time to time.
Marg