Remember Labor's Chris Bowen wanting to abolish franking credit refunds four years ago? Retirees were outraged. He replied, "If you don't like our policies, don't vote for us". We took his advice and we kept our franking credit refunds.
Despite the franking credit debate being at the forefront of Labor's election loss, it's amazing how many people didn't understand what it was all about. Even my dermatologist didn't understand. After I had explained it to him, he went and invested in shares paying fully franked dividends. I am happy for him - although not so happy that he charged for the time it took me to explain it - and I'm happy to explain it again to the cabinetmaker in the pool and anyone else who wants to listen.
Here we go: Let's assume a very simplistic example whereby you hold shares in a company which pays company tax of 30% on its earnings. The remaining 70% are distributed as dividends. So if you receive (say) $10,000 in dividends, then this amount is "grossed up" again to its pre-company tax level of a 100% (remember that the $10,000 you receive represents only 70% of the company's pre-tax profit!) or $14,285.71.
Therefore, you are being taxed on an income of $14,285 even though you only receive $10,000 in cash. So how much tax do you pay on an income of $14,285? (assuming you have no other income) $1,408.45, that's how much. However - and this is where the franking credit kicks in - you receive a credit for the tax the company paid, namely $4,285.71 which is offset against your tax assessment which in this particular example means that you receive a tax refund of $2,877.26.
So, whenever your own tax rate is below the company's tax rate of 30%, you will receive a refund. If your investment is in a superfund which pays only 15% income tax, you have half the franking credit refunded to you. If your superfund is in pension phase, you have ALL the franking credit refunded to you. Three cheers for franking credit refunds!!!
As they write, "If the Albanese government were something you bought in the shops rather than voted for at the polls, regulators would be circling with writs for misleading and deceptive conduct."
Labor went into the last election without any policies, least of all one as controversial as abolishing franking credit refunds; in fact, on the election campaign trail last year, the then not-yet Prime Minister Anthony Albanese insisted changes would not occur under a Labor government. "We've said we have no intention to make any super changes", he said in May last year. He has once again provided the answer to the perennial question "How do you know when a politician is lying?" The answer is, of course, "When his lips are moving".
One thing you must never do is to trust Labor because, like a dog with a bone it can't leave it alone, they are at it again and anyone hoping superannuation regulations will remain unchanged again in the next Federal Budget on 9 May 2023 is likely to be disappointed. They've done enough jawboning to indicate they're ready to target high balances in super. This is despite the superannuation system introduced by Labor thirty years ago in 1992 encourages savers to use the wonders of compounding to build up such large amounts.
There's been a lot of talk of introducing a cap of $5 million. Labor needs some political wins to rein in the budget deficit and the 11,000 Australians with more than $5 million in superannuation are an easy target. That was in 2018 and it’s more likely 20,000 or 30,000 now.
When Chris Jordan, the Commissioner of Taxation, was asked at a conference how members had accumulated such large amounts in their Self-Managed Superfunds (SMSFs), he said balances were usually accumulated for over thirty years or funds held one or two investments that had done extremely well. He called the large SMSFs "accidents of history" and added, "Don’t design the system for the last worst person.”
You don’t need to be Einstein (who never actually said that compound interest is the Eighth Wonder of the World, but let’s go with it) to use a calculator and work out the dramatic impact of compounding. Anyone with a good income and spare savings who decides to invest in equities in superannuation for decades will accumulate large amounts of money. Every kid should be taught the power of compounding at school.
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The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return.
Simply divide the annual rate of return into 72 to give you the approximate number of years it takes to double the investment. Alternatively, divide the number of years into 72 to give you the required annual rate of return.
 The Rule of 72 dates back to 1494 when Luca Pacioli referenced the rule in his comprehensive mathematics book called Summa de Arithmetica. Pacioli makes no derivation or explanation of why the rule may work, so some suspect the rule pre-dates Pacioli.
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Sure, $5 million is a lot of money but it does not take vast wealth to accumulate such an amount with consistent investment over long periods. Consider how many working-class people now own $3 million homes in the western suburbs of Sydney by committing to a long-term savings pattern over thirty years called – wait for it ... it’s a devious scheme that should be capped – 'paying off your home'. And many also qualify for the age pension!
I haven't heard Labor repeat the same arrogant line "If you don't like our policies, don't vote for us", but I hope their invitation still stands!
