Labor's plan for imputation credits could cut retirement savings by 9% and slash holdings of Australian stocks, ANU research finds

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  • Labor’s plans for imputation credits would effectively cut super fund balances by 9%.
  • Those most affected would be retirees who are self-funded and don’t qualify for the pension.
  • The proposal to end cash refunds for excess imputation credits would also likely see super funds cut their holdings in Australian equities.

The Labor Party’s proposal to end cash refunds for excess imputation credits will result in a significant hit to the hip pocket of retirees, according to economic modelling from the Australian National University (ANU).

The impact would be significant, particularly among those retirees who are self-funded and don’t qualify for the pension, cutting the average superannuation fund balance at the point of retirement by up to 9%.

The calculations show the current system of returning excess imputation credits delivers 5% to 6% increase in spending power over the course of retirement.

The dividend imputation scheme was introduced by Prime Minister Paul Keating in 1987 to prevent the double taxation of dividends, once as company profits and then again as personal income.

The Howard Government later modified the scheme to allow individuals and super funds to claim cash refunds for any excess imputation credits not used to offset their tax liabilities.

The Opposition proposes to reverse the Howard Government’s changes.

“It’s a pretty hot button issue amongst retirees at the moment,” says Geoff Warren of the ANU College of Business and Economics.

“By buying Australian shares that are fully franked people actually end up with a real kicker to their investment return.

“That benefit we found is worth up to 5% or 6% in income during retirement on average. It’s a pretty large number. So threatening to take it away is quite significant for some.”

Associate Professor Warren says the modelling, published in the paper What Dividend Imputation Means for Retirement Savers, also showed how the policy change may lead to a shift away from Australian stocks.

“Under the current system, having access to imputation credits can support holding a portfolio with a considerable ‘home bias’ towards Australian equities,” he says.

“Equity home bias is often seen as unjustified, but the research suggests it is a rational response to return differences.”

For a retiree starting with a super balance of $500,000 at age 65, who targets spending $42,764 a year, the modelling suggests, when imputation credits are included, this person should hold 46% in Australian equities on average to achieve that target.

When imputation credits are excluded in the analysis, the retiree should hold 26% in Australian equities.

“It’s a considerable difference,” he says.

“A change in policy might result in retirees providing less support to Australian companies via the investments they make.”

The study also analysed the net cost to the government of providing access to imputation tax credits to retirees. The results showed an estimated total net cost per individual over the course of their retirement of about $30,000 for retirees that retire with a $100,000 balance, and $80,000 for those retiring with $500,000.

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