Baby boomers have been the major beneficiaries of rising housing prices over the decades. That does not necessarily mean it’s a good investment decision for them to buy residential property as they near or begin retirement.
A tight labour market and sticky inflation suggests that the Reserve Bank is not about to cut the cash rate. Indeed, it’s more likely the bank will lift it again – good news for those with cash and term deposits.
Labor’s $3m cap proposal could repeat franking credits debacle
It was the Spanish-American philosopher, essayist, poet and novelist George Santayana who famously said, “those who cannot remember the past are condemned to repeat it”. It’s a truism the Labor Government should remember well as it approaches the 2025 federal election.
In this instance, the past is the 2019 federal election. In that ‘unlosable’ election, Labor took to the electorate the policy of abolishing cash refunds for excess franking credits, subject to a carve-out for some age pensioners.
Its thinking was that by the offering to abolish the cash refunds that were largely going to self-funded retirees – the savings to the budget were estimated at $59 billion over a decade – Labor could use the money for worthy social causes such as education and health.
What made the proposal even more appealing was the fact it would target ‘wealthy’ retirees – about 200,000 self-managed super funds (SMSFs) or about one-third of these superannuation funds. These retirees, who had had the audacity to structure their retirement income in a way that was tax effective and totally legal, were seemingly fair game.
So confident was Labor that it was on a vote winner, the then Shadow Treasurer, Chris Bowen (pictured), said, “If you don’t like our policies, don’t vote for us”. As a letter writer to The Age responded immediately after the election result, “Well, thank you, Chris Bowen, I appreciated your advice when it came to making the final decision on how to vote.”
This voter, a lifelong Liberal voter, was switching to Labor. But that cryptic comment from Bowen stopped him in his tracks. “You attempted to drive a wedge of resentment between us elderly retirees and our children and grandchildren by branding us as fiscal cheats who were unfairly claiming refunds of ‘unpaid’ taxes on share dividends.
“Sadly, for you, our families are obviously not that gullible and your tactic backfired spectacularly as I, and presumably hundreds of thousands of other modestly self-funded retirees, heeded your words and switched back to the ‘devil we know’.
The key word here is ‘modestly’. When analysts began digging into the numbers, it was discovered that many of these ‘wealthy’ retirees were living on about $60,000 a year and the loss of their cash refunds would reduce their income by about one-third. Even with home ownership, a retired couple having $40,000 of disposable income can hardly live the life of Riley.
What Labor failed to factor in was that these 200,000 SMSFs – and potentially affecting the other 400,000 – had children and grandchildren. A supposedly wealthy cohort of about 300,000 potentially became about two million voters.
Labor denied this policy cost it the election. But it was a factor which Labor implicitly acknowledged when it scrapped the policy after Anthony Albanese took the reins in May 2019.
It’s worth recalling this as Labor pushes ahead with its decision to introduce a tax on earnings on balances exceeding $3 million after a Senate committee gave it the thumbs up last week.
The language is similar. Wealthy self-funded retirees getting tax breaks they don’t deserve. And the numbers are small, this time only 80,000 will be affected. What they don’t add is Labor’s refusal to index the $3 million cap will see this number increase exponentially as it sweeps up the farming community, small business owners, professionals, judges and senior public servants. Venture capital, which the Government professes it wants to encourage, will also be impacted.
What’s also downplayed is how it’s violating a long-held tax principle in this country – not taxing unrealised capital gains. The consequences of turning this principle on its head will potentially see farmers and small business owners, in particular, have to find the money to pay a windfall capital gain that has not be realised. The Government’s response that such a potential liability should be factored into a fund’s asset make-up is so divorced from commercial reality that it could only have emanated from Canberra.
It’s undeniable this proposed $3 million cap has not caused the angst that accompanied the policy of abolishing cash refunds for excess franking credits.
But give it time. Certainly, it leaves the Government wide open to scare campaigns, especially by enshrining the principle of taxing unrealised capital gains. The arguments will definitely lack merit, but when has that every mattered in the heat of an election campaign.
