The incentive to work hard, save efficiently and become a self-funded retiree is being seriously eroded by both sides of politics.
The Liberals, led by treasurer and former social services minister Scott Morrison, decreed retirees must earn 7.8 per cent income on their investments.
Now Labor leader Bill Shorten wants to deny tax credit refunds that are essential in trying to earn that income.
Last year Mr Morrison decided pensioners would lose $3 per fortnight per $1,000 of assets they had over the assets test threshold. That is a loss of $78 per year. So the $1,000 must provide 7.8 per cent income just to replace the pension lost.
There’s little point in keeping money in the bank with interest rates on deposits around 2.5 per cent. Few investments pay 7.8 per cent income with security. A total return of 7.8 per cent will do, coupled with a capital drawdown strategy to provide the needed cashflow.
Many retirees have invested some of their money in property, either residential or commercial, Australian shares, or managed funds including overseas shares. These may earn the necessary returns, made up of income plus capital gains.
Australian shares also provide refundable tax credits that help boost the income. If a company pays a 5 per cent dividend, adding the tax credit makes it 7.14 per cent.
Labor wants to stop refunding the tax credits. This means a new tax is being applied to retiree income if it is from shares, but not if it is from other sources. Tax credits from shares ensure company profits are not taxed twice.
When investors buy shares they become part owners of the company. The company pays 30 per cent tax on its profits. The shareholder receives the other 70 per cent as dividend, plus the tax credit. They then pay tax on the total at their marginal rate.
If their marginal rate is zero, as it is for most retirees, the tax the company paid on their share of the profits is refunded to them, as it should be. Mr Shorten wants to deny the refund.
Suppose a retiree couple have $1 million of investments. They get no age pension and have a lower total income than a couple with only $350,000 because they cannot earn 7.8 per cent income on their money.
They can earn $28,974 income each, $57,948 total, and pay no tax. There will be no tax on the rental income they receive from property, or on the dividends from overseas shares, or on their bank interest.
However their income from being part owner of a company and sharing in its profits will be taxed 30 per cent. Why are we discouraging people from saving for retirement beyond a basic asset level?