Question of the Week

Question of the week – will the Paid Parental Leave introduce tax on super?

Co-founder of the Switzer Report
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Q. I am not sure whether I am barking up the wrong tree, but is the Paid Parental Leave policy of the Liberal Party effectively a back door method of introducing a tax on superannuation funds? It is highly likely that companies will have to pass on all, or some of the 1.5% levy to shareholders in the form of reduced dividends.

By way of example, assume a dividend rate across a super fund’s investments in blue chip equities is 5% a year. Obviously, the return for a fund with $500,000 invested is $25,000. But, assuming an average company distribution rate of 75% (e.g. CBA 76%, WPL 80%, WOW 67%) passing on the full 1.5% levy of the PPL scheme will reduce the 5% dividend rate to 3.75%, i.e. a reduction of $6,250 in the funds earnings. In other words the fund could be paying the equivalent of a tax rate of 25%. As you know, currently, in pension mode, no tax is applicable.

Of course, companies could pass on the 1.5% to customers, but that’s not always possible with existing long term contracts, and it might not be a good idea in today’s retail market. And then there would be multiplier effects, and a big spike in inflation compounding things for the RBA’s rates decisions, etc. etc.

Is my logic OK? Anyone care to write us an article on this?

A. Thanks for the question.

While I am no huge fan of Mr Abbott’s Parental Leave Policy, I don’t think it is a backdoor way of introducing a tax on superannuation funds. While an increase in the tax rate may lead to a slightly lower dividend, Mr Abbott has also said that the dividend would be franked at the higher rate (31.5%). If he goes ahead with this latter commitment (and he may not have been fully briefed when he said it), the net after tax cost for most superannuants will be zero.

Let me take an example to demonstrate this (note, I don’t agree with your maths).

Assume a company makes a profit of $1,000, pays tax at 30% ($300), and pays out 75% of the remainder as a fully franked dividend (75% of $700) = $525. The dividend has a franking credit of $225 (i.e. ((30/70) x $525).

There is one shareholder. If the shareholder is an SMSF in pension mode, the net after tax return = dividend + imputation credit = $525 + $225 = $750

Under Mr Abbott, the company still makes $1,000, pays tax at 31.5% ($315), and pays out 75% of the remainder as a fully franked dividend (75% of $685) = $513.75. The dividend has a franking credit of $236.25 (i.e. ((31.5/68.5) x $513.75)).

There is one shareholder. If the shareholder is an SMSF in pension mode, the net after tax return = dividend + imputation credit = $513.75 + $236.25 = $750

While there will obviously be some impact on the economy, it will have no impact on shareholders if the dividend is fully franked and companies are allowed to frank at the higher tax rate.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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