Brenda: So the government would give me $6,478 if I stopped working and owned shares instead.

Peter: Seeing that the dole is $14,305, you’d nearly be getting half the dole, Mum.

Brenda: I’m not going on any dole. As my father said ….

John: But how much would it cost to buy enough shares to do that?

Are there really grandparents who fund their kids’ private school fees with the government’s franking credits pension? How many shares do you need to get a franking credits payment which is two times the size of the old age pension? Find out now, in Episode IV of The Kitchen Table.

The Scene: Brenda tells John and Peter how Penny, Mrs Baker’s mother-in-law, managed to get $3.2 million into her self-managed super fund (SMSF) and how much government money now goes into her fund because the fund holds shares in the Commonwealth Bank.

John: Go on Peter, tell us what happens if you’re not working. Why would that make any difference?

Peter: The numbers are saying that some of those who work the least, get the most. They’re the winners on the franking credit league table.

Brenda: What sort of tax system is that? Sounds like someone designed it in Charles Dickens’ day. That can’t be true, not in 21st century Australia. A nice man like Mr Howard would not like this one bit.

Lower end earners

Peter: If we begin at the lower end and work our way up; starting with you, Mum. You’re a small winner. Let’s see where you’d be if you stopped working and owned lots of CBA shares instead.

You’re on $21,595 at Mrs Baker’s sandwich shop. That’s totally tax free with your LITO and LAMITO [see Episode 2]. What’s interesting is: if you had 3,510 CBA shares, you’d get exactly the same amount, also tax free.

You’d get $15,117 from CBA, that’s dividend money in the letter box. And the government would send you an extra $6,478 through its franking credits cash payout.

Brenda: So the government would give me $6,478 if I stopped working and owned shares instead?

The Kitchen Table: the Quest for John Howard’s Cash Offset

Peter: Seeing that the dole is $14,305, you’d nearly be getting half the dole, Mum.

Brenda: I’m not going on any dole. As my father said ….

John: But how much would it cost to buy enough shares to do that? I bet it’s a lot.

Peter: $245,500 based on a $70 CBA share price.

Brenda: Well we certainly don’t have that sort of money sitting around.

Peter: Some people can afford it. And a lot of them are unhappy with Mr Bowen’s plan to get rid of the franking credits cash payout. They want the full government-supported 8.8 per cent dividend yield. Not just the standard 6.2 per cent that CBA pays.

John: Why is the government supporting CBA’s dividends? That doesn’t sound very sensible. Shareholders on government support. Really?

Peter: Some people are saying it’s costing the government $100 million a week. Or $5 billion a year.

John: Isn’t that how much one of those French submarines are costing us?

John: Can we move on please. I want to hear about your chat with Mrs Baker. She sounds like the sort of woman who’d have an angle on this.

High end, tax-free SMSFs

Brenda: OK. I’ll tell you what she told me yesterday. I think I have this right.

I finished my 4 hours work – made all the sandwiches. Turns out, Mrs Baker is only too happy to talk about these franking credits. Everyone’s talking about them at the moment, she says. And she loves them. So does her mother-in-law. “Penny the pensioner” the family call her. It’s all done with franking credits.

Penny’s in her 70’s. She doesn’t work anymore. She started with 10,000 CBA shares in her superfund, after she sold the Bakers’ dough making business years ago: Dough Maker’s Warehouse it was called.

John: Hang on. How’d she get 10,000 CBA shares into her super fund? Mr Goldilocks can only add around 100 CBA shares a year. Maybe he could do a few more. But he hasn’t got 100 years left in him to get to 10,000. He keeps bumping into the $25,000 annual limit, once his compulsory super has gone into his balanced fund [see Episode 3].

Franking credits: if you’re old enough to understand super, you’re too late

Brenda: As I said: Penny sold the business in a company she had. Dough Maker’s Warehouse. It made all the ingredients for dough for all the bakeries around here. Somehow the accountants got the money out of the company and into her super fund. Obeyed all the rules, Mrs Baker says. She got a few million into the fund.

Peter: It looks like Penny Baker is using a Self Managed Super Fund. An “SMSF”. They cost about $2000 to set up. A basic one. And then there’s accountants’ fees every year, plus a few other fees and charges.

I’ve read on the APRA website that SMSFs are “complying superannuation funds” but they’re not APRA-regulated. Its just you, your fund and the Tax Office. They’re called “ATO-regulated” funds. I think this means that if you and your SMSF obey the tax office rules then you’re fine.

Last year Kelly O’Dwyer told an Australian Financial Review conference that there were 577,000 SMSFs and they had around $721 billion in them. That’s around $1.3 million on average.

Brenda. Mrs Baker explained how they got around the $25,000 annual limit. Mrs Baker says … thanks to the rules at the time, the limits on what you could put into a super fund were much higher than they are now. Especially of you had after-tax money.

It took a few years, but the accountants got most of the money into her super. She says Mr Costello helped with his: “put a million into super” announcement in September 2006. Sort of like an all-you-can-eat offer.

Anyway, the money from the sale of Dough Makers went in. Dividends and franking credits came next. It all adds up. And over the years, her SMSF had been buying more and more CBA shares. She stopped buying when the fund reached 12,700 CBA shares.

John: Why’d she stop there?

Brenda: The next step is really important, dear. Because Penny’s in her 70’s and isn’t working, she’s transferred part of the super into zero tax mode. Not only does that part of the super pay no tax, but everything she takes out of it: zero tax on that too. Penny doesn’t pay a penny.

Anyway, that’s what Mrs Baker says. Its franking credits all the way. Cash in hand! It’s Mr Howard’s magical offset again with a dollop of Mr Costello to get her up and away.

Peter: Sounds about right. But slow down a bit. She couldn’t switch all her millions into zero tax mode. It’s what Kelly O’Dwyer was on about in 2017. Penny is only allowed to have $1.6 million in zero tax mode now. It’s commonly called pension-phase. The rest had to go back to accumulation-phase, where it’s taxed at 15 percent. Or if you didn’t like accumulation-phase, Ms O’Dwyer let you take it out of the super game entirely.

Brenda: Don’t start Mrs Baker on Kelly O’Dwyer! KO’D – her initials say it all. She KO’d Penny’s super fund. It looked like a knockout punch as far as the Bakers were concerned. She had $3.2 million in pension phase. Kelly said that’s too much. So they flicked the excess into accumulation-phase.

Peter: It wasn’t that bad Mum! Switching half Penny’s fund’s assets to accumulation phase cut its CBA yield from 8.8 per cent to 7.5 per cent – that’s 8.1 per cent on average, which is still way over what CBA actually paid.

In accumulation phase, you go down to half government money on your franking credits.

The pension punchline

Peter: Mum. You said Penny Baker has 12,700 CBA shares in her SMSF at zero tax mode at the moment. You know what this means don’t you Mum?

Brenda: Not really.

John: Tell us, son.

Peter: It means:

Those 12,700 CBA shares are worth around $889,000. That’s way under the Kelly O’Dwyer $1.6 million cap.
And Penny’s SMSF’s franking credits from CBA this year give her $23,457 cash.

And the SMSF paid no tax. And Penny paid no tax. That’s no tax on the dividends and no tax on the franking credits. And no tax on her cash-in-hand.

John: Go on.

Peter: Don’t forget, the singles old age pension for people starting today is $23,457. It’s the same number!

John: What? How come Mrs Baker’s mother-in-law is getting the same amount from the government as my Mum gets on the old age pension?

Brenda: It’s what the Bakers call Penny’s “Franking Credits Pension”.

John: Doesn’t sound self-funded to me. It’s government funded.


Next episode: Peter figures out that the Tax Office is a franking credit factory. And that companies buy franking credits from the Tax Office every time they pay tax to the ATO. And how it’s up to companies like CBA to decide when those franking credits are let loose into the economy.


Editor’s Note: Every three months AFSA (the Association of Superannuation Funds of Australia), updates its assessment of a “modest income” and a “comfortable income” for retired people. AFSA calculates that a single person needs $43,317 a year to live comfortably in retirement. That’s just about the cash value of the franking credits on $1.6 million worth of CBA shares. Result: the Kelly O’Dwyer cap can pay you close to double the old age pension, in cash.

Penny Baker’s imaginary super fund has $3.2 million in assets. According to the ATO, just over 3 per cent of SMSFs (around 20,000 funds) have at least $5 million in assets.

This year, the franking credits on $1.6 million worth of CBA shares – mind you, that’s the franking credit money, not the dividend money – is exactly enough to pay the school fees for two of Penny Baker’s grandsons at Kings School Prep.

And now for some basic history:

1987: Bob Hawke, Paul Keating introduce franking credits (corporate tax rate 49 per cent)
1992: Paul Keating introduces compulsory super (corporate tax rate 39 per cent)
2000: John Howard introduces franking credit cash-back (corporate tax rate 30 per cent)
2007: Peter Costello removes 15 per cent tax on super pension-phase (corporate tax rate 30 per cent)
2017: Kelly O’Dwyer caps assets feeding a SMSF tax-free pension at $1.6million (corporate tax rate 30%)

It was all one way until Kelly O’Dwyer, commendably, showed some restraint. O’Dwyer, it is fair to say, would not have been warmly received by many wealthy Liberals with large SMFSs.

Sources:  ASX website, APRA website, Australian Taxation Office website, Department of Human Services website, Productivity Commission website, Association of Superannuation Funds of Australia website.

The Kitchen Table: a Franking Credits Revelation