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Franking credits, boomer blaming and the generational divide: Editor's Views

Emma Rapaport  |  31 Jul 2021Text size  Decrease  Increase  |  
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The relationship between the investor community and the Federal Opposition has begun to heal. The Australian Labor Party dumped its multi-year pursuit of negative gearing and capital gains tax deductions this week. The retreat comes months after Labor axed its policy to end cash refunds for excess franking credits. The issues are just too politically toxic, and as Phillip Coorey put it in Australian Financial Review, Labor is seeking to minimise avenues of attack ahead of the next election and focus the campaign on the Government's handling of the pandemic.

“The focus should be on what Australia looks like in the future, not in re-prosecuting the last election campaign," Opposition Treasury spokesman Jim Chalmers said this week.

For those who joined investment markets in the last year, you'd be hard-pressed to find a more hot-button issue for investors. It was a time when a unique quirk in Australia's tax code made national news and sent hordes of angry retirees to community halls across the country. If you believe some, the issue contributed to the ALP losing the "unlosable election" in 2019.

For me, the franking credits debate was perfectly summed up by two opposing articles – one in a youth digital publication known at the time for its Bachelorette recaps and another among the pages of the Murdoch press. In Junkee, Osman Faruqi explained how "the rich boomers are using an extremely sneaky scheme to steal your money", describing the turn-of-the-century reform to allow "wealthy" non-taxpaying retirees to claim cash-back on their franking credits as a "massive scam". The $12 billion saved, he said, would be better spent on public schools, hospitals and welfare services. But over in The Australian, columnist Robert Gottliebsen repeatedly pushed back against the characterisation, telling his readers that the ALP had got its figures wrong in putting together a policy that would "attack the retired poor". "This is a tax that aims at the battlers," he wrote, helping to brand the policy as a "retiree tax". An intergenerational contest for the ages.

Bill Shorten went on to lose that election, but the issue has lived on. On a podcast last week, comedian Charles Firth joked that the best way to get the 60+ population of Sydney's wealthiest suburbs vaccinated was to threaten to take away their franking credits (and negative gearing). Retirees won't let the issue go either, despite it being squarely off the agenda. Don’t mention 'Chris Bowen' at an investor day unless you’re looking for a fight.

Let's not re-argue the details of the policy. One thing is for sure—no one seeking electoral victory will confront retirees for a long, long-time. The franking debate was so effectively weaponised that even those who were not directly affected were terrified of it. For me, it comes down to fairness. For a generation who built the franking credits system into their retirement planning, they felt the rug was going to be pulled out from beneath them. I get that. Planning for retirement is a multi-decade proposition and requires a high degree of certainty. There are some things we can't know for sure—when we're going to die and how much money we'll need in retirement—but retirement policy should aim for stability. But I do hope my generation can plan for retirement without a policy so widely derided.

As the 2021 Intergenerational Report makes clear, we're headed for decades of tough, divisive and politically charged retirement reform, particularly around the cost of superannuation tax concessions. This will again bring intergenerational tensions to the fore. For Gen-Y, it's important that we remember that we still have time on our sides. As the first generations to go through their entire working lives with the Superannuation Guarantee, we will reap the benefits of a lifetime of compounding savings. For older generations, as the years slip away, returns and enhancements to returns like franking credits and capital gains are critical. There is, of course, no more time to overcome mistakes. But as Graham Hand put it so aptly in Firstlinks, 'Boomers' need to fess up to just how good they've had it: a favourable superannuation system with high limits; little or no tax in retirement; surging property prices; excellent bond and equity markets; and free education. As my first act of good faith, I whole-heartedly support Graham's continued pleas for simplification and an end to the infighting. Now if we could just get together on the "fourth pillar" of Australia's retirement system…housing. For all the talk about superannuation and investing, owning your own home is a critical part of security in retirement.   

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In Your Money Weekly ($), Peter Warnes unearthed a pre-GFC article to show just how quickly things can unravel. "We are seeing parallels to another time when valuations were stretched, attitudes were carefree, and excesses were the order of the day," he writes. "We are living through extraordinary circumstances and no one knows which way the cards will fall. Beware of those with strong convictions."

Where the bloody hell are we on retirement income? That was the question posed by Graham Hand in Firstlinks this week. Noting our PM's experience as an ad man, he laments the superannuation sector's preferred for "overflowing with unappealing terms few people understand". "Psst ... would you like some extension relief on your non-arm's length arrangement?"  ¯\_(ツ)_/¯ Hand also dives into the Treasury's position paper on the Retirement Income Covenant where fund members will be encouraged to spend more of their capital to live on. Don't be put off by the name – it's an important piece of reform, particularly for SMSFs.

The last week of July signals the start of Reporting Season. Again, Morningstar has put together a handy calendar for you so you don't miss a beat. Lewis Jackson speaks with several equity analysts about what to expect and what to look out for in several key industries.

Big investors are divesting from fossil fuels – should you? Jackson speaks with bulls and bears on the future of fossil fuels. He also surveys BlackRock's recent voting record. The heavyweight fund manager voted for more climate proposals than ever before.

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is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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