Bill Shorten wants your grandparents’ last $45
In this week’s video insight Roger discusses Bill Shorten’s attack on franked dividends. He’s simply putting millennials against baby boomers. Is voting for Labor a vote against your parents and grandparents?
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Max Zan
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I have one question for Chris.
If when you retire and you don’t have sufficient Assets accumulated to fund your housing ,living, health and retirement costs who do you think should pay for them?
Chris
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With the greatest of respect to Greg, that’s all very good, but it’s undeniable fact about the massive and easy free kick that the boomers had towards wealth, one that will never be repeated again in any other generation.
No HECS (university was free), the urban sprawl had not commenced and so, even buying the proverbial shoebox in the middle of nowhere would have made you money.
Double digit interest rates are a furphy, because when you consider the average wage versus the average median house price, then use the RBA website to allow for inflation and wage growth. Rates at 7.0% (i.e. “normal” rates) are equivalent to the 19% rates that your parents had when you compare like with like. Wages have also not kept pace with house prices, therefore, everything is so much more expensive than it used to be. Fact.
I’m glad that your parents had hand me down cars, because I certainly never did and my first one was a 15yo station wagon, then I ‘upgraded’ to a 10yo car for another six years. The newest car I had (always paying cash) was a 3yo stock standard domestic sedan back in 2014, and I felt like a millionaire when I drove it. Still do.
Buying into Government floated companies like a bank was a complete no-brainer; Blind Freddy could see you would make money. The boomers do not have a monopoly on paying tax either, so as much as they accuse Gen X and Y of whinging, maybe they should look at themselves to not expect a medal for paying tax. We all do and to every other tax base that the boomers do too…but the generations below the boomers will have paid more, purely for the upkeep of those above them. It’s simple numbers.
Chris Daniels
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Australia is a welfare state so this proposal is not at all surprising from labour.
David
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Bill Shorten seems to be (deliberately) ignoring a fair tax principle – that franking credits exist to avoid the double taxation of public company earnings in the hands of the company’s owners (shareholders). If a shareholder is entitled to a refund it is not a free gift of money from the government but merely a rightful reimbursement of excessive tax they have already paid by the in the form of company tax. In a fair world, the government should actually be paying back the refund with interest!
Greg McLennan
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Good post. Thanks Roger.
I have been contemplating this over the last day or so and I have considered as a case study, my parents. They are millionaires, probably a few times over now when property appreciation is taken into account. I have two siblings, and I’m now in my early forties. My siblings and I also had a private school education. Must have been a pretty easy upbringing, right? Silver spoons and all that?
Not exactly. My parents both came from modest beginnings and they were both school teachers. Dad got a job in the Education Department after a while but it didn’t pay much more. They bought a house in the east of Melbourne, far enough out that there was still the odd vacant block around, and paid interest rates in the double digits where the first digit was a two. Having had some experience in the public school system, my parents were motivated to send the three of us to private schools, which I am still grateful for. My parents were diligent in putting one income into the mortgage and lived off the other one.
That meant that we never travelled overseas for holidays as a family. We never flew to Noosa for a holiday at a flash resort. A night out was dinner at the Malaysian Inn rather than Florentino’s. Holidays for us were a trip down to Gippsland where we stayed with my grandparents on the coast. They drove a 1969 hand-me-down HT Holden and a 1974 hand-me-down Volvo which came from my respective grandparents and drove them until the mid-late 1990s. In other words, my parents made great sacrifices so that their children could benefit from private schooling while going without themselves for some twenty years. Once we left school, Dad started investing the available money into the stock market in such names as CSL and CBA at their respective floats and many other household names. The timing was fortunate but they deserved the rewards. Not sure how many ten-baggers are in my parents’ portfolio but there are plenty.
These are the people in Bill Shorten’s firing line. They have made considerable sacrifices, have paid tax on every dollar they earned, and delayed gratification by paying for their children’s education then putting then current earnings into superannuation under the prevailing rules at the time with the intention of making themselves self-sufficient and as a result, they are not a burden on the tax-payer. Not only that, but they are still contributing to the tax base in every other way that various state and federal governments can think of, other than income tax.
Yet now, Bill Shorten thinks they need to be fleeced some more, and apparently so do many financial commentators, and some who have commented here.
I read about people my age who are complaining about those retirees getting a free ride or feeling like they are the only person on the ferry paying the full fare and just how unfair that is and I feel positively ill. Guess what guys. If you are forty odd, have small children and a mortgage and can’t afford to have the holidays you would like, the car you would like or eat at the restaurants you would like, well tough. The reality is that you haven’t earned it yet.
Stop whining and grow up.
Peter Bryan
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Brilliant! that’s exactly my views on the subject expressed very succinctly.
In Future, I will have great difficulty in voting for the Labor party as they may scrap Franking credits.
Based on a Cuffelink’s article, I could lose around $4000pa of my SMSF.
PeterB
Max Zan
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Hi Roger & fellow readers
Some interesting and diverse comments there.
What a lot of people fail to realise is that Superannuation is a BIT OF A CON.
You are forced to pay 15% tax on compulsory employment and other concessional contributions and earnings in the accumulation phase throughout your working life and if you are lucky enough to get to and retire at 60 and convert upto $1.6 m of your Superannuation into the pension phase you don’t pay any tax on earnings. That’s great ! Everyone should aspire to do that and not rely on Taxpayer support through Centrelink. Imagine how much better off the government finances would be. What most people don’t realise is the Government is actually conning and encouraging you to do that.
There is a perception that Self funded and Superannuation retirees are bleeding the country dry – that’s not so. Even though they pay no tax on income when Funds are in pension phase, they still pay 10% GST on goods and services when they spend their forced minimum drawdown. Also, when a person dies and leaves their superannuation to a non dependant beneficiary such as their kids, the Tax man steps in and takes a further 17% of the funds that were previously concessionally taxed. So all up the tax man has the potential to get 32% out of Superannuation and that’s why it’s a BIT OF A CON. The 15% rate initially looks attractive but there are strings attached.
I would not recommend a young person put more than compulsory employer contributions into super as the funds are locked away for decades and the age you can access funds will likely be stretched out from the present 60 years to 70 years.
Superannuation is a CON.
andrew ronan
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I’ll second that, well said Max.
David
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Roger. Unfortunately this whole issue has been twisted by the post retirement zero tax debate. It will, in fact, affect EVERY shareholder. Those earning MORE than $37,000 taxable income will get the FULL 30% rebate. Those earning LESS than $37,000 will get LESS (19% down to 0%) rebate.
Robin Hood would be shocked …. give to the rich …. take from the poor.
Roger Montgomery
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Thats why a progressive approach needs to be applied.
rob barnett
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Hi Roger,
Wow I find the mix of comments amongst your subscribers most interesting. I agree entirely with your premise. The issue that cuts with me the most is that people planned their affairs based on the rules that were set in place & made long term decisions which cannot be readily wound back by the whims of politicians. These people are now no longer in a position to unscramble their investing eggs & are very vulnerable. This is disgraceful. This is what is not fair. Good on your Roger.
Best regards, Rob
Roger Montgomery
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And they cannot UN-retire either!
Chris
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I agree with Luke. The argument of “I paid tax all my life” is moot. Did you use roads, schools, libraries, hospitals etc. ? That’s what tax money is meant to be for, not to prop up someone who appears poor on paper and lives in a $800k house !
I, with all of Gen X and Y will also have paid taxes all our lives too and will be the real ‘self funded’ retirees because there won’t even be a part pension when we retire. It’s happening out of necessity, because there just isn’t enough money to go around and is a function of those people who are paying tax already, which is a much smaller base than before.
On the one hand, I don’t see why it is appropriate that someone who is earning 60k a year income inside their super fund (already tax free and which would have to be an easy, average 5% return – for example, CBA at $4.30 and $74.89 is a 5.7% yield, capital growth as a free kick and a refund of franking credits means an even higher yield) pays no tax, yet someone working as a salary earner and earning the same income pays tax at 30%. The GST should account for this because at least that is a consumption tax, and everyone “consumes”.
On the other hand, I can see that you need to incentivise people to save for their retirement through the carrot of superannuation (a system that has goalposts that are always changing…24 different changes in the past year alone) and the stick of ‘there won’t be an aged pension when Gen X and Y retire (for the above reasons), but the design of how you do it has to be smarter.
Giving one generation huge tax breaks and incentives at the future expense of everyone else implies it is merely a pork barrelling exercise it is to win the boomer votes (as the biggest voting block).
Taxed on the way in, taxed whilst it’s in there and taxed when it gets taken out unless you’re over 60….all the while subject to the vagaries of myopic politicians who can’t see past the next four year term. Superannuation was always about the boomer generation, and when they pass on, the attitude will be that “Well, you’ve got Superannuation Gen X and Y, you don’t need a pension”, and “But your house is worth over a million dollars, you’re a millionaire (with all the cachet that comes with it, yet a million will be commonplace and being one not that special)…can’t you just sell it and live somewhere else ?”
Mark my words.
Roger Montgomery
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You might recall this piece Chris from 2013: https://rogermontgomery.com/dear-under-50-investor/
Grant Harvey
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Roger,
I’m interested in your thoughts regarding the effects of franking laws on ASX listed businesses. Particularly the incentivising of investment in high dividend (typically low growth) listed companies, and the resultant shareholder cohort pressuring management to overpay dividends(chasing the tax advantaged dollars) and as a result foregoing reinvestment/ business growth. My understanding of the incentives at play, having read your book, is that the franking ‘cash backs’ may/are producing a perverse influence on the way dividend paying businesses are being managed, foregoing reinvestment/growth for immediate (tax free… for some) returns.
Secondly, if the current franking system remains unchanged could we not end up having an ASX Top 100 company entirely owned by individuals in the 0% tax phase, resulting in an effective corporate tax rate on said companies profits of 0%? … I’m hoping I am wrong on this one!
Nick
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Taking up Rodrigo’ s query, if he gives (i.e. “gifts”) his son money, why is the question of tax being raised? I assume his son has no ownership rights on his father and that the income is unearned. Company taxes are, in effect’ “tax withheld” and paid to the ATO on behalf of the shareholder (owner of a share of the business). So Labor is incorrect to say “no tax has been paid” by the shareholder. Labor’s proposal is therefore not consistent: imputation credits can be used to offset other taxes payable but the credits are lost if one does not have any other tax payable. Eliminating dividend imputation altogether would be consistent – but that’s not what Labor’s proposing. And what sort of “equality” do we aspire to? Equality means tyranny – pure and simple – the state distributing wealth equally at gunpoint because there would be no other way of doing it. We may aspire to reducing inequality – another matter entirely.
Taking up Franco’s point about tax free super, perhaps super should be eliminated altogether and everyone should be eligible for the aged pension and all earnings taxed at marginal rates, no matter one’s age – now that would be “fair”
Lester Green
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Good article Roger and thank you for speaking out and providing a credible argument. Yes, I’m a baby boomer…..and proud of it.
Janette
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Roger,
Thank you for your video.
As an idea, what about shareholders being given a choice to select to receive gross dividends when providing TFN details to companies? Ie similar to gross interest received from savings accounts. Whatever tax or refunds due can be sorted without franking credit refund pilfering…
John
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Okay Roger
This is an interesting perspective on franking dividends. Your argument is that it is a sledge hammer approach to the problem of intergenerational inequity, as well as a more general social inequalities, does not target the ultra wealthy segment of the older generation. By the way I think the problems that millennials will face are far worse than most have recognised – espeically those that will not inherit – but regrettably only time will be the true judge of this.
I am not totally convinced by your analysis – though I find it interesting – and I do think you tone is probably a little too political (not that I care much for either side) but I think the more interesting question to be asked is how does a governments can actually achieve are more equitable solution without relying on welfare and other regressive means? By equitable I mean equality of opportunity.
Having somewhat of MMT/Georgist perspective I think I know some of the answers to these questions but I think it is up to critics to put forward a view that goes a little beyond the usual nonsense of, we need to grow the pie some more/or markets need to be free, and offer pragmatic solutions to these problems.
Best
John
Roger Montgomery
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It is not intended to be political. The fact that one party is proposing a tax change that will impact people in a regressive way is the issue that I have. I would have the same issue were it any other party.
John
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‘Not intended to be political’ – fair enough but this is why I think it is necessary to offer an alternative means of taxing labour and of ensuring inequity does not escalate.
I do not think it is good enough to use the usual line – that politicians consistently – that public services need to be made more efficient. Some of the worst policy of the last 30 years has been selling off wealth generating public assets and replacing them with private (often offshore) companies that are devoted to boosting executive incomes, engaged in perverse behaviour (the royal commission is generating some good examples) and provide poor services that the public necessarily have to cop. This occurring in a market that has become increasingly uncompetitive.
So what means do we actually use to address this problem??
Roger Montgomery
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Notice that I didn’t list assets. I listed agencies. The real issue that we have to export 7 tonnes of iron ore to be able to afford to import 1 iPhone. Until we start adding value to our exports (rather than raw materials and live cattle) we will always be a price taker and suffer from a Balance of Payments Current Account deficit, which then means we have to either borrow money or sell our assets in order to to support your profligacy. You can read about it here https://rogermontgomery.com/wp-content/uploads/2015/01/Monty_December-6.pdf
John
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Yep, your argument holds up Roger – too many agencies and not enough leadership encouraging real economic development – public and private. The lucky country is run by third rate people who also share in its luck. Also, when I checked back I can see that you have not showed political bias.
best john
Franco
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That sounded like a very biased evaluation of the issue. Your example of a retired couple paying
rent/mortgage is poorly chosen.
I would have liked you to explain what you believe to be a fairer tax system in retirement, mentioning the elephant in the room—–tax free super after 60.
Roger Montgomery
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Franco, I am not the party making the proposal. I am responding to what has been proposed by a party that hopes to make a new law. The fact is that the tax change will impact people regressively. Its really up to them to offer a more sensible proposal.
Rodrigo
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Hi Roger, I think that’s an unsavory fear mongering rant. One would think you’re getting ready to launch your own political campaign. You forgot however to touch on the most important thing : Fairness, equality, consistency.
If I give my (young unemployed) son $500 a month as pocket money, out of my post tax salary, he doesn’t pay taxes on those $500, that’s obvious. But is he allowed to go back to the ATO and ask for a reimbursement of the tax I paid on those $500? given that he doesn’t work and therefore his tax rate is 0%, and I’ve paid taxes of around 30% on those $500? No he is not! so why should retired share owners be allowed to claim that back? By the way, I know I will be a retired share owner one day. But that doesn’t cloud my sense of fairness.
Roger Montgomery
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If that is your issue, then you need to take it up with the people who have enshrined a zero per cent tax rate post retirement.
Kelvin Ng
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Hi Roger, I agree with your view on Labour’s proposed changes on franking credits.
However, their proposed restriction on negative gearing and their proposed cutting back of capital gains tax concessions make a lot of sense – the current policy settings on these points just exacerbate inequality (even though I’m potentially arguing against my own interests – but self interest should not be the guiding principle in all things).
Kelvin
Roger Montgomery
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I don’t disagree with you there.
Luke Fennell
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Sometimes I have reason to catch the ferry across from Mosman to the city mid-morning. Looking around the ferry I realise that I am perhaps the only passenger who paid full fare, I am the only one going to work, I am the only one with a mortgage and probably the only one paying any tax. The passengers travelling with me have no dependants, have enjoyed massive tax-free capital gains in their homes, enjoyed tremendously generous super limits that are now unavailable to those that follow, have resisted attempts to allow higher density housing in their area and benefited tremendously from the recent huge increase in immigration and inflow of overseas capital into housing. All will claim that they worked hard and paid tax all their lives – yet I am the one working to pay for the ever increasing cost of their medical expenses, which now gobble up more and more of the budget at the expense of education for my kids.
Some have had to deal with the tragedy of accumulating so much in their super fund they were forced to move assets and….pay tax (oh the horror). They are now at risk of losing cheques from the ATO because they own shares in companies with franked dividends.
My heart bleeds.
Roger Montgomery
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I fear you have completely ignored the point of the video. Listen to the last few minutes again. A progressive treatment of the situation IS exactly what I am suggesting. If you earn millions and are getting cheques from the ATO, it needs to be addressed. If you are an individual just making ends meet, with a full pension and the minimum allowable additional income coming from a share portfolio then you should be able to keep the franking credits. Finally, addressing your remaining observations; 1) That will be you Luke one day on the Ferry. 2) It’s government inefficiencies gobbling up your taxes – have a look at this page: https://www.australia.gov.au/about-government/departments-and-agencies/list-of-departments-and-agencies and this page https://stateoftheservice.apsc.gov.au/learn-more/aps-agencies-size-and-function/ 3) What time of the day are you catching the ferry Luke? That ferry is filled to the brim with tax-paying employees – many of whom I know are working well into their 60’s – when I have been on it.
andrew ronan
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Wow, that list of gov departments and agencies says it all, and if you check up on how many people are directly reliant on the public purse for their income it’s 1 in 2 voters in Australia and %58 in the USA and growing, this is not remotely sustainable, it’s also the reason our political parties have drifted to the left over the last couple of decades due to a growing left voter base.
It’s hard to see how this trend can change without reaching its eventual and predictable outcome. This current storm in a teacup is just another divisive little number in the identity politics the left side of politics is heavily engaged in currently.
This kind of government intervention is exactly why i stopped putting money into super a few years back, and I bet it’s only the start of things to come, some of which may include forced allocation of super funds into public infrastructure projects and the like, just imagine the returns on those. This just adds to our already bad reputation for government interference in many ways, and why I also think we are better off investing elsewhere.
Roger Montgomery
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We wrote about an article about the idea of minimising contributions to Super here in 2013…https://rogermontgomery.com/dear-under-50-investor/
andrew ronan
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That 2013 article of yours is a must read for every citizen, and a good wake up call for every one regarding super and general trust in government, I think this situation is poorly understood by the majority of people.
jimbo james
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Spot on Luke. Policies change. Get over it. I missed a ridiculous CSS super scheme n my current employment. Those just before me retired at 49 years 11 months and we shared a laugh over a beer when we determined their indexed pension that transferred to their spouse (80%) when they passed was worth more than they earned in their lifetime, let alone whatever they contributed! Yet here am I unable to make a single contribution above and beyond company contributions due to it being taxed at my marginal rate. It happens. The piper needs to be paid at some stage.