Large super funds & SMSFs should be on equal footing for franking credits

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Larger super funds and SMSFs should be on an equal footing when it comes to franking credits, says the Alliance for a Fairer Retirement System.

Alliance spokesperson Professor Deborah Ralston says that franking credits should be worked out at an individual member level in all super funds – to prevent large super funds being able to provide refunds of credits to retired members, if Labor’s policy to stop refunds of franking credits is implemented. Ralston is also Chair of the SMSF Association.

Ralston said Labor’s policy involves “inherent” discrimination against SMSFs, in part because some large super funds will be able to pass on refunds of franking credits to retired members.

“However, some large superannuation funds may not be able to pass full franking credit refunds to members if they have a large proportion of members in pension phase, and consequently insufficient tax liabilities to offset the tax credits. In essence, an individual’s tax treatment will depend on what type of super fund they have,” Ralston said.

Ralston argues that if the policy intent is that franking credits only go to those paying tax, then the measure should be designed so that it applies at the individual member level in all types of superannuation funds – including both SMSFs and large APRA-regulated super funds. This would mean that there was not an incentive for SMSF members to move their balance into a large retail or industry fund that was paying tax in order to keep, a proportion of, their franking credits.

“Any changes to the tax treatment of franking credits should be applied equally irrespective of their superannuation structure,” Ralston said.

“One recent superannuation policy change which did this was the introduction of the $1.6 million cap on tax-free pension accounts. In this case ALL superannuation fund members were treated equally, no matter how they invested their retirement savings.”

Ralston also noted that Labor’s ‘Pensioner Guarantee’ – an exemption from the franking credit policy for those on the Age Pension and similar payments – won’t cover all Age Pensioners.

“The simple fact is Labor’s proposal will not exempt all pensioners,” said Ralston.

“Any individual who became an Age Pensioner after 28 March 2018 and has an SMSF will lose their franking credit refunds. Those not involved in an SMSF, but who qualify for an Age Pension after 28 March 2018, would still be exempt from this proposal while they continue to receive an Age Pension.”

Related: Are Age Pensioners exempt from Labor’s franking credit policy?

Though it isn’t only Age Pensioners in SMSFs that won’t be fully covered by Labor’s Pensioner Guarantee. Age Pensioners in some large superannuation funds – those that don’t pay tax, either now or in the future – will also lose franking credits, according to Ralston.

Ralston said that SMSFs are an “integral” part of the superannuation system, as they provide “choice, control and competitive tension”.

“Any proposal that puts the 1.1 million SMSF members at a disadvantage is not only discriminatory but removes an important element of competition from the superannuation system.”

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