You may have seen recently in the media that the SMSF Association has lodged its submission to the Senate Economics Committee regarding their inquiry into the impact of losing refundable franking credits.

Our policy team has highlighted throughout their submission the clear inequities and flaws in the Labor Party proposal to remove franking credits.

The advocacy effort was also strengthened by a Summit held by the Alliance for a Fairer Retirement System. The Alliance, which is a group of several like-minded Associations, heard from keynote speakers from Government, industry, academia and the retiree community.

The Assistant Treasurer, Stuart Robert, described Labor’s proposal to deny refunds of franking credits as “unfair” during the Summit and added: “The critical point is that more than 45 per cent of the 900,000 people are 65 years or older. Any changes will overwhelmingly hit low and middle-income earners, with 84 per cent of the individuals impacted on taxable incomes of less than $37,000, and 96 per cent of the individuals impacted on taxable incomes below $87,000.”

The Summit has emphasised that many will see reduced adequacy of incomes in retirement, it will be unfair in terms of taxing individuals on the same income at different rates, it enhances the uncertainty surrounding retirement incomes, and clearly is a threat to the sustainability of the retirement income system by incentivizing more people to move to the age pension.

We break down some of the crucial points of the SMSF Association submission below and highlight some of the things you may need to turn your mind to in the near future, as an SMSF trustee.

The intention of the dividend imputation system is to avoid excess taxation via ensuring that dividend income is taxed at a shareholder’s marginal tax rate, akin to a sole proprietor who earns the same net profit. The proposed policy undermines this position.

This is the basis for which the SMSF Association supports the current policy settings for the dividend imputation system as it ensures that income is taxed only once.
The Labor party are incorrect when they say they are targeting a ‘loophole’ where individuals are paying no tax and also receiving a refund. This is because it is actually the refund that ensures the taxpayer doesn’t pay tax and is assessed at their marginal tax rate.

Distorting the imputation policy to target low rate taxpayers is poor policy. Firstly, because low rate taxpayers will effectively be paying a higher tax on their dividends through the loss of franking credits. Secondly, because individuals on higher taxable incomes, will not lose the benefit of franking credits.

The proposal disadvantages individuals with an SMSF compared with members of large superannuation funds, with the latter able to ensure that the full value of franking credits is offset against income derived by members in the accumulation phase.

Under the proposed policy individuals with the same circumstances, in the same refundable position, will incur a different result depending on the vehicle they choose to hold their shares. Most notably, SMSF members are worse-off under the ALP policy than other superannuation fund members who are in pension phase and benefit from franking credits. 

Labor is unlikely to receive the $55 billion in revenue over a decade they forecast due to a likely shifting of asset allocation, the impact of the $1.6 million TBC and transition to retirement income streams changes, individuals rolling out of SMSFs, and SMSFs including more members to generate income that franking credits can be offset against.

SMSF trustees are also extremely engaged with their superannuation that is why they have opted to take control of their retirement savings. If Labor are elected and do implement the policy under the current proposals, SMSF trustees will look to alternative strategies to minimise the effect. One of these strategies may be to include younger members with taxable contributions into the fund to use franking credits.

The proposal will force SMSF trustees to reconsider their asset allocations with an incentive to move away from Australian-listed shares. As at June 2018, SMSFs invested $229 billion or 31% of SMSF assets in listed shares, the largest of any asset allocation.

Building on the likely shifting of asset allocations, it is no secret that SMSFs are heavily invested in Australian listed shares that provide franking credits.

We anticipate SMSF trustees in conjunction with their SMSF Specialist(s) will seek other investment classes to counter the tax they will need to pay on listed share income. These may include non-company investments (e.g. trust vehicles), foreign investments and property.

This may lead to funds having a higher risk allocation in the retirement phase to achieve income, distort Australian share prices and weaken the domestic supply of capital to Australian companies.

The proposal further corrodes trust in the superannuation system and will result in difficult and costly restructuring of financial affairs for older Australians.

We believe any changes to dividend imputation requires a long transitional timeframe to enable retirees to respond and other savers to revise plans. Ad-hoc strategies to curb the impact of the franking credit reform, particularly to individuals who are nearing retirement or retired, may involve certain financial risks, asset exposures and Capital Gains Tax implications which are not appropriate.

The SMSF Association will continue to advocate against on the policy but will also look towards developing helpful strategies for trustees to combat its potential effects on your SMSF.