Pensioners spared, but there's still a political cost for Bill Shorten

Bill Shorten has paid a tiny fiscal price to adjust his $59 billion plan to claw back tax refunds. The political cost is the real danger.

The Labor retreat is smart and strategic. The Opposition Leader and his treasury spokesman, Chris Bowen, show they are listening to a large group of older Australians they cannot afford to ignore.

The original Labor policy raised about $5.6 billion a year by cancelling cash refunds to those with low taxable incomes who received franking credits on the dividends they earned on their share portfolios.

Opposition Leader Bill Shorten has announced changes to his franking credits policy to exclude thousands of older Australians.
Photo: Alex Ellinghausen

The revised policy, just two weeks later, raises $5.2 billion in its first full year. As reported by Fairfax Media last week, Labor only had to sacrifice $400 million a year from its huge revenue gain in order to exclude the vast majority of Australians who are over the age of 65.

“What we’ve done is we’ve robbed the government of whatever scare campaign they might have had,” Shorten said on Tuesday morning.

There was no mea culpa, no admission they made a mistake in the first place. Shorten tried to portray the backflip as a graceful dive. “What we’ve done today is made a good policy better,” he said.

But why should pensioners applaud him for threatening them with the loss of thousands of dollars over the last two weeks?

The lesson for older Australians from the last few years is to be on guard against sudden policy changes from both sides of politics to raise revenue at their expense. This applies to tomorrow’s pensioners, not just today’s.

Shorten and Bowen are not retreating on the key tenets of their policy: that the cash refunds are a “loophole” because they go to people who do not pay tax, that the benefits go to the relatively wealthy, that their fix is a progressive tax reform.

The fine print of their fix is vital to the political debate through to the next election. Labor is excluding all pensioners and part pensioners who own shares and receive dividends in their own name - individual shareholders, in other words.

The treatment of self managed superannuation funds is different. Labor will spare any SMSF with at least one pensioner member, but this is a grandfathering exercise that only applies to the ranks of today’s pensioners. The deadline to qualify is Wednesday, 28 March.

Opposition Leader Bill Shorten and shadow treasurer Chris Bowen announce the changes at Parliament House on Tuesday.
Photo: Alex Ellinghausen

This is a warning signal to Australians approaching retirement. If you have a share portfolio in an SMSF and are preparing for retirement in the years ahead, do not expect to keep any cash refunds on your shares. You will lose the cash refunds on the franking credits on any shares held in that SMSF.

The Labor policy is meant to start in July 2019. With Labor ahead in the polls, and an election due by May 2019, older Australians with SMSFs will have to watch carefully to consider what they do.

Malcolm Turnbull’s response will be to exploit this fine print in Shorten’s plan. He will be able to argue that some pensioners are still caught by the Labor policy, because some of tomorrow’s pensioners are bound to use SMSFs.

The crucial point is this is a relatively small group. Bowen says the policy revision “grandfathers” around 13,000 SMSFs out of about 200,000 SMSFs originally targeted. That offers a sense of perspective on the numbers.

Some of the calculations being made are difficult to reconcile because Labor’s original policy used numbers from the 2014-15 tax records while the revised policy uses projections from the Parliamentary Budget Office on the 2019-20 figures, when the policy starts.

The new figures assume 893,000 taxpayers will bear the $5.2 billion burden of the policy by losing cash refunds on their franking credits.

Older Australians continue to benefit from the Coalition's decision in 2006 to drop taxes on superannuation in the retirement phase. This decision looked unaffordable to savvy observers at the time; they were proven right within two years when steep budget deficits began.

Even so, the constant change to the tax rules on older Australians give these voters good reason to unleash their anger on both major parties. They know they will be targeted again because that is the lesson of the last five years.

Labor seemed hesitant on Tuesday morning when asked if they had any more policies in store to adjust superannuation rules. Bowen mentioned the super guarantee levy, which applies to workers and employers rather than retirees, but it was a hint of more to come.

Even if they offer a guarantee of some sort for older Australians, these voters will know better than to rely on it.