Let’s give Bill Shorten a tick for recognizing that his plan to end cash refunds of excess imputation credits was going to cause some pain. His backdown on Tuesday, described as a “pensioner guarantee”, brings relief to 300,000 elderly Australians.

He announced that an estimated 232,000 aged pensioners receiving a part pension, and 45,000 full rate aged pensioners, would continue to receive cash refunds of imputation credits on their direct share investments. A further 13,000 SMSFs with at least one member receiving a government pension would also be exempted (that is, their SMSF would be eligible for a cash refund).

But not the other 585,000 SMSFs and their 1.1 million members, or persons under 67 who don’t get government support but have low incomes (such as non-working spouses or adult children with share investments).

In fact, Bill Shorten’s relief only reduces the saving to Government over 10 years from $59bn to $55.7bn. A million Australians are still impacted, possibly even more if some of the bigger super funds are caught (members will see lower returns). His revised plan remains a naked tax grab (see my earlier story on why this is the case)

Sure, there are a small number of SMSFs (members) who get big cash refunds – some in the millions of dollars – but these are the exception, rather than the rule. The usual 80/20 or 90/10 rules apply to this distribution like most other things.

And the thing that irks the 80% is that the Government keeps shifting the goal-posts. This really grates on self-funded retirees, who feel that they have worked hard, spent frugally and saved to ensure that they have sufficient funds for a comfortable retirement. They have committed to a long-term plan based on one set of rules – and then the Government changes those rules and they are not in a position to do anything about it.

Shorten’s proposed change in the third over the last three years.

A big change was the superannuation reforms last year, which reduced the caps on contributions into super, taxed the earnings on investments supporting transition to retirement pensions, and introduced a limit of $1.6m on how much money could be transferred into the pension phase of super and enjoy access to the 0% tax rate.

However, the change that has caused the biggest impact is the reduction in the assets test for the aged pension. An initiative of the final Abbott/Hockey budget in 2015, this came into effect on 1 January 2017. About 90,000 elderly Australians lost their aged pension, and a further 235,000 pensioners had it reduced as the limit on assets got crunched.

The essence was to lower the limit on assets that a couple could own (excluding the family home) from approx. $1.2m to approx. $800,000 (today, CPI adjustments have taken this up to $837,000). If a couple has more than $837,000 in assets, they aren’t eligible for a government pension.

The assets of most retirees are their superannuation balances. While $838,000 sounds like a reasonable sum to have invested in super, if it is earning 5% pa, this generates an income of only $41,900 pa. Sure, it is tax free, and is also higher than the full rate Government aged pension of $35,573 pa.

But an income of $41,900 doesn’t make a couple “rich”, and without some careful management of outgoings, barely “comfortable” either.

And yes, they can draw down on their capital (which the system wants them to do), but many retirees are worried about outliving their savings and are scared to take more than the regulated minimum drawing

Mr Shorten’s proposed imputation credit change will make it even harder. Let’s take the same couple. Suppose that 50% of their super is invested in Australian shares paying a dividend yield of 5%. On the dividend income of $20,950, their super fund will have imputation credits of $8,978, which are currently refunded in cash. This boosts the potential income the fund is earning (and can pay them) by 21% to $50,878.

Still not “rich”, but more likely to be comfortable. However, if Shorten gets elected and introduces his policy, our couples are staring down quite a big cut to their income.

Fairer Options

I have argued that the system of dividend imputation, which includes the refunding of excess imputation credits, means that every taxpayer gets the same benefit. Further, company profits are effectively taxed at the marginal tax rate of the recipient, which is entirely in keeping with a progressive tax system. (see my article I wrote here).

The fairest option is therefore not to change the system.

However, a bit like the superannuation “honeypot”, this looks like a “honeypot” to Shorten and his ALP team, and they want the money to build a war-chest that can fund spending promises and/or personal tax cuts. So, a full retreat is very unlikely.

If they feel they need to change the system, a fairer option (and massively easier to administer) is to implement a cash refund cap. I don’t have the resources of the Treasury or Parliamentary Budget Office to crunch the numbers, but a cap in the range of $10,000 would pass the “pub test” and exempt those on low to medium incomes, including many self-funded retirees.