The confusing super noise around dividend imputation

Super Review conducted its annual roundtable at the Conference of Major Superannuation Funds in March and found that superannuation funds continued to face a range of challenging issues in 2018, from insurance inside superannuation to the evolution of post-retirement products.

Roundtable participants:

• Mike Taylor, Managing Editor, Super Review
• Eva Scheerlinck, CEO, Australian Institute of Superannuation Trustees
• Raewyn Williams, Managing Director, Research, Parametric
• Andrew Proebstl, CEO, legalsuper
• Brian Zanker, Business Development Leader, Mercer
• Nick Callil, Head of Retirement Incomes, Willis Towers Watson
• Frank Crapis, Head of Life Product, Comminsure
• Geoff Brooks, Head of Marketing, Equipsuper

The Federal Opposition’s announcement on winding back dividend imputation has received a mixed reaction but there is deep concern in the superannuation industry that it may simply give rise to further confusion among fund members.

MT:        I thought we’d kick off with the question that seems to be creating all the headlines, particularly in The Australian which seems to have an agenda, I can’t imagine why, around dividend imputation and the ALP’s policy which clearly will probably continue to play out right till the end of the year and into the election. So, Raewyn, I am told that you know a thing or two about dividend imputation so I’m going to start off with you. 

RW:        My background is I was a tax lawyer, but the interesting thing about this is not the technical aspects really, it’s actually I think, the legal aspects.

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My reaction is that the last thing we need in terms of tax reform is this kind of piecemeal reform that seems to be motivated by politics, or maybe a need to fill a funding hole, and what makes it worse is that it’s targeting superannuation when as an industry we’ve been saying year after year that just constant reform really damages confidence in the industry.

So, I can certainly talk about the technical aspects, but I actually think the things we really want to respond to as an industry around the dividend imputation proposals are more to do with the motivations of it and whether it really reflects a long-term vision. 

NC:         Yeah, I think that’s right. I think the funds here [at CMSF] by and large won’t be affected by it, so I think it’s a pretty targeted policy.

It’s a bit surprising to me they’ve put it forward, but I think you can justify it. My personal view is that it’s a large asset you could trim, but there’s a lot of those self-managed superannuation funds (SMSFs) out there that are enjoying the benefits from this and so they’ve decided to have a go at them on the basis that the income tax cuts that it would be funding would be of greater appeal to a wider audience in the right seats.

So that’s the calculus. I agree, and technically it’s fairly straightforward from the way I look at it, but I think that’s their game.

ES:          Our view is a little different. We think this is a loophole that was created some time ago when budgetary times were pretty good, and it doesn't continue to make any sense, particularly as it continues to grow. The amount of cash back that’s handed out every year through the dividend imputation system. So, we would like to see that much more targeted I guess and have fairer tax history in superannuation than what this allows through either SMSFs or, you know, wealthy people.

AP:         I think I agree with what Raewyn was saying, I think this risks reform fatigue, the fact that the government keeps tinkering with the system and the average person doesn't often read the detail of what the announcement is and all they hear is “the government’s tinkering again”.

So, even if these changes actually impact a particular cohort of people, wealthy people with SMSFs, who are perhaps the main target, I think the announcements that are made just generally cast this pall all over superannuation generally for the public and just continue to shake confidence in the system. There’s inconsistency there as well that on the one hand people talk about the system not providing adequate retirement savings, and then we’re saying, “There’s too generous concessions.”  We in the industry might read the detail and get the nuances of what’s been said, but the average person just hears the headline … it’s the tinkering and the piecemeal approach I think that really is dangerous and we’ve talked about that for a long time. 

RW:        It’s like there’s really dangerous sound bites that anyone can take out of this announcement.  This is a media that picks up dangerous sound bites that people make decisions on the basis of. 

GB:         Generally, members don't pick up the nuances of SMSF versus industry fund. It causes uncertainty, particularly among the retirement cohort because no one watches their super more than the retirement cohort and people in drawdown phase because the relationship with a super fund becomes more akin to that of a bank, once they get to retirement phase they’ve got regular transactions and so on. 

I think probably from our point of view it’s more of a nuisance because we have our own financial planning business as well within the fund, it’s more nuisance value because most of our members won’t be impacted by it. I think the $1.6 million cap had far greater impact on the number of our members because we’ve got relatively high account balances than this will have. But still it’s noise out there and members generally aren't very good at filtering it without some help.

BZ:          Mike, I reckon there’s a better way of collecting. That’s a relatively small gap that they’re plugging by doing something that’s really noisy, and a simple adjustment to something like your consumption tax or GST would’ve been a pretty minor impact to achieve a much bigger outcome from a budget perspective.

I agree with the comments that have been here, just the perspective that constant playing around, whether it’s the top end of superannuation members or whether it’s anyone, any tinkering means bad news. 

NC:         It’s not of itself a superannuation issue. The people who hold shares outside super, don't have any super, are still affected by this, but it’s interesting to note that they [the Federal Opposition] may have underestimated this.

But I would say to that the noise while it’s loud is infinitely less than it would’ve been if they’d decided to do something like GST –

NC:         This is not whether it’s a good idea or not but it’s a reasonably smart package in terms of –

GB:         Politically?

NC:         - any time you get a raised revenue this is a fairly good way to do it approach, yeah. 

GB:         Yeah, you put a fence around it and contain it.

BZ:          The other one that comes out with that is the negative gearing, have they underestimated how many of the average people in Australia actually tries to have a property to leverage what their retirement savings is, an investment property?

I reckon they’ve underestimated it big time. You only have to look at the slow-down in investment lending, and there’s a few factors there, but the slowdown in investment lending gives an indication that it’s not only the top end that’s doing that. 

RW:        You raise an interesting point about asset allocation because one thing we know about certainly self-managed super funds, self-directed investors is they love Australian equities and they really love the franking credit benefits that they see in Australian equity. So where would that cash move to and will it move to property or some other area where that just creates another set of issues?

ES:          I think the opposition leader’s been quoted the same, like you should look at property.

GB:         If we look at negative gearing of property and that, though, I think housing affordability is a big issue and at the other end of the spectrum you’ve got a lot of younger members who might see some of these things as actually a positive because they’re battling to meet day to day needs and cost of accommodation and so on, I think they might look at this through a different prism and there could be a lot of appeal there.