By the time I headed off to bed last Saturday the federal election was effectively over, with Labor leader Bill Shorten conceded that it was unlikely that Labor would win the seats required to form government.
The election result came as a surprise to many political pundits, given that most polls had predicted a comfortable Labor win in the run-up to the election.
As I write this, the Liberal/National coalition has secured 78 seats, ensuring a majority for the new Morrison government in the upcoming 46th Parliament of Australia.
Waking up to a cold Sunday morning with the previous day’s election result rattling around in my head I decided that a ride to the hills was in order. Donning copious layers of cycling gear to ward off the chill, I pointed my trusty bike in the direction of Eltham and off I rode.
Leaving early, my route took me through a still sleepy Brunswick, the inner-city suburb just north of Melbourne, out through Heidelberg and finally to Eltham, nestled at the foothills of the Shire of Nillumbik in Melbourne’s outer east.
Elated in Eltham, Bummed in Brunswick
Eltham sits in the electorate of Menzies, and the incumbent Liberal candidate, Kevin Andrews, comfortably retained his seat with a Two Candidate Preferred (TCP) vote of 57%. Having a well-earned brekky at the Eltham shopping strip it was hard not to notice two distinct themes.
Firstly, I was surrounded by people in their mid-fifties and beyond, a demographic oft-labelled “Baby Boomers”. Secondly, these Boomers were (from their demeanour and the bits of conversation I caught), thrilled that the Coalition government had been returned for another term in office. It was fair to say that the mood in Eltham that Sunday morning was positively “chipper”.
The ride home took me through the heart of Gen Y-centric Brunswick, in the electorate of Wills, where Labor’s Peter Khalil held off a stern challenge from The Greens. There the cafés lining ultra-hip Lygon Street told a very different story.
The mood in Brunswick was distinctly more sombre, with none of the energy pulsating around Eltham. Poker-faced twenty and thirty-something Millennials sat huddled in cafes in quiet contemplation.
In the few short hours I spent riding that day I saw the two sides of the election outcome; the winners and the also-rans. And as a Gen X, wedged between the Boomers and their Gen Y kids, I find myself asking one question: what exactly happened on Saturday 18th May and what does it mean for the various generations?
Read on to find out…
It was all about those Franking Credits
Labor’s proposal to end the ability of self-funded retirees to claim excess franking credits attached to dividends received from Australian shares turned out to be the defining issue of the election campaign.
Franking credits were originally designed to ensure that individuals were not subject to double-taxation; i.e. to avoid a situation where companies first pay tax only to have their shareholders pay tax again on the same income.
The franking credit was the mechanism to ensure that individuals effectively only paid “top up tax”, being the difference between the company tax rate and their (presumably) higher individual tax rate.
This equitable relationship broke down in 2001 when the law changed to allow franking credits to be paid to any taxpayer, even those without any taxable incomes, such as Age Pension recipients.
The real game changer, however, came in July 2007, when self-funded retirees over the age of 60 were allowed to have their private superannuation pensions no longer subject to tax.
These individuals can however still claim franking credits on the Australian shares they hold, even though they don’t pay any income tax on the dividends.
It appears that Australia is the only country in the world that provides this level of largess to retirees, allowing a cohort of relatively wealthy individuals to experience ‘negative taxation’ from the age of 60 onward.
Mo Money, No Problems
How big is this tax-payer funded benefit? For some Self-Managed Super Funds (SMSFs) it can amount to between 25% and 30% of the total income generated on an annual basis. And in a nutshell that was what the election furore surrounding the so-called “retirement tax” was about.
These (relatively) wealthy retirees did not want ‘their’ tax credits, supplied by working Australians, taken off them, and mounted a spirited and highly effective campaign against the proposed changes.
Who benefits from maintaining the excess franking credit rebate? This question was put to the Parliamentary Budget Office during 2018 and their analysis was, pardon the pun, frankly unsurprising when it comes to SMSFs.
According to their analysis (see table below) over 80% of the benefit goes to SMSFs larger than $1 million, with over 50% going to SMSFs over $2.4 million.
The Budget Blues
OK. So excess franking credits for self-funded retirees are a form of transfer payment from working Australians to retirees. That much is clear. But exactly how much does it cost Australian taxpayers each year?
The PBO analysis, based on 2014-15 tax data, suggested a figure of around $5 billion. Current estimates put the amount closer to $6 billion.
What exactly does $6 billion pay for in the Budget? Well, based on the projections for the 2019-20 Budget, that would cover…
- 7% of the Health budget, or
- 17% of the Education budget; or a whopping
- 56% of the amount allocated to “Assistance to the unemployed and the sick”.
That last one is perhaps the most galling, as it includes Newstart, a benefit paid to those seeking employment, and that has not increased in real terms in some 25 years.
Gen Y Bother At All?
So with the return of the Coalition government wealthy retirees get to keep their excess franking credits. But will their children enjoy this same largess when they retire?
It is unlikely, as the current trajectory is fiscally unsustainable.
At some point the party will have to come to an end, and when it does those supplying the franking credit Kool-Aid to retiree Boomers (namely Gen X and Gen Y taxpayers) will find themselves facing a retirement tax regime nowhere near as accommodating.
Let’s just hope it ends amicably, equitably and before the life expectancy of the youngest Boomer which, according to my reading of the Australian Government Actuary’s latest life expectancy tables, would be in around 30 years.
For if it doesn’t we’ll have consigned an entire generation of Australians to a standard of living appreciably lower than that experienced by their parents. Hardly what you’d expect in the Lucky Country.