Labor’s non-refundable franking credit policy unfairly targets SMSFs

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Labor’s policy to stop most refunds of excess franking credits unfairly targets SMSFs, the SMSF Association has told an inquiry into franking credits.

The House of Representatives Standing Committee on Economics has been conducting an inquiry into refundable franking credits – effectively an inquiry into the opposition’s policy to stop refunds of excess franking credits with some exemptions, including pensioners and some SMSFs.

SMSF Association CEO John Maroney told the hearing of the inquiry in Adelaide that the policy will have a negative impact on SMSF members compared to members of larger super funds. The Committee was told that this distorts the key tax principle of horizontal equity (that people with similar income and assets should pay the same tax).

“SMSF members in retirement phase will generally lose the benefit of franking credits if they are not refundable, while large superannuation funds can ensure that the full value of franking credits received are utilised against income derived by younger members still in accumulation phase,” Maroney said in a statement released by the SMSF Association.

“Therefore, an individual in retirement phase in a large superannuation fund with the same balance and same allocation to listed equities as an individual in an SMSF will be substantially better off by still receiving the full benefit of franking credits. This is a clear departure from the principle of horizontal equity in the taxation system.”

“The change would single out SMSF members as one of the few groups of taxpayers who will have the profits of companies they own taxed higher than their marginal tax rate. Instead, SMSF members in retirement phase will have company tax paid on their share of a company’s profits when none should be paid.”

“In addition, the proposed policy targets the wrong SMSFs. Labor’s policy announcements suggest it has the top 10% of SMSFs with assets exceeding $2.4 million in its sights,” said Maroney.

Labor didn’t claim that the policy targeted the top 10% of SMSFs. Labor’s fact sheet on the policy says: “Of all excess imputation credits refunded to SMSFs, 50% of the total benefits go to the wealthiest 10% SMSF balances (which have balances in excess of $2.4 million).”

Maroney noted that SMSFs with large balances will likely still be able to fully utilise their franking credits, as they will have tax payable as a result of the Transfer Balance Cap pushing some of the assets into accumulation phase.

“SMSFs with assets below $1.6 million, whose members have worked hard to provide for a reasonable retirement and do not receive the Age Pension, will lose 100% of their franking credit refunds and about 10% of their income,” he said.

Maroney told the Committee that Labor’s policy would encourage retirees to drawdown on their capital and rely more on the Age Pension, increasing pressure on the Federal Budget.

“The retirement income incentive for a home-owning couple to save upwards of $850,000 is now severely reduced under the non-refundable franking credit proposal.”

“This is because, from an income perspective, such a couple may be better off with less assets, a part-Age Pension and refundable franking credits. It actively discourages people from saving for a self-sufficient retirement.”

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