200,000 SMSFs to be hit by ALP policy to stop franking credit refunds

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The ALP has announced a policy of stopping refunds of excess dividend franking credits, impacting some 200,000 SMSFs along with 1.2 million other taxpayers.

Labor plans to reverse a change made by the Howard government making dividend franking credits fully refundable, from 1 July 2019 if they win the next election.

Update: Labor exempts pensioners from plan to stop refunding franking credits

“Self-managed super funds are a major beneficiary of this practice, with 50 per cent of the benefit to SMSFs accruing to the top 10 per cent of SMSF balances – with some funds receiving cash refunds of more than $2.5 million a year,” says the joint statement by Bill Shorten and Chris Bowen.

“Failing to reform this unfair revenue leakage puts a greater tax burden on low and middle income working Australians.”

Mr Shorten will reportedly say in his speech today that 200,000 SMSFs will be impacted by this change. Though the number could be higher – according to ATO statistics almost 213,000 SMSFs were fully in pension phase in 2015/16, though this may be reduced by the Transfer Balance Cap it also excludes other funds that otherwise currently receive a refund of franking credits.

The ALP says the policy has been costed by the Parliamentary Budget Office as saving the Federal Budget $11.4 billion over the forward estimates, from the start date.

“Shareholders who may be affected will have the ability to adjust their investment decisions to limit any impact from this policy,” says the joint statement, without elaborating what actions Labor envisions shareholders taking – which could include selling shares.

“Labor will consult with the Australian Tax Office, Treasury and tax experts on the implementation of this policy. Labor has already announced it would provide substantial new resources to the ATO to ensure our policies are implemented effectively.”

Labor expects “scare campaign” on franking credits, Liberals label plan a “tax hike”

Labor Shadow Treasurer Chris Bowen told ABC Radio: “I fully expect a scare campaign from the Government. I fully expect self-managed super, in particular, to be unhappy about this. Some people have managed their affairs to maximise their refunds. I accept that. But what we’re doing is giving plenty of notice that an incoming Shorten Labor Government will reform this system.”

“I understand that people who will no longer receive their refunds will be unhappy, but importantly nobody will be receiving a tax bill. It’s not like we’ll be taxing people for the first time, or somebody will start paying tax.”

Bill Shorten has since announced that estimated 250,000 Age Pensioners impacted will be compensated, seemingly through an increase in the pension.

Minister for Finance Mathias Cormann, also speaking to ABC Radio said the proposal was a “$59 billion tax hike”.

“Whatever way you look at this, this is an increase in tax. Labor can come forward with this proposal but they should not try and dress it up as something it is not. It adds $59 billion to the tax revenue of the Commonwealth if implemented,” he said.

Treasurer Scott Morrison said Labor’s proposal would impact around 40% of all SMSFs. In a Facebook post he said that “Labor plans to steal the tax refunds of older Australians, including pensioners and retirees”. He also raised the issue that the change would create a disadvantage for SMSFs compared to large APRA regulated fund:

Take an industry superannuation fund. They don’t claim a lot of these benefits because they have the ability to wash that and set against other parts of tax that they have paid on other assets. If you have your money in an industry fund, as opposed to a self-managed superannuation fund, you will be able to use all the tax credits in the industry fund but you won’t if you’re in a self-managed super fund and you’re relying on shares. This was dealing with an inequity in the original system.

Industry mostly opposed, plan could “backfire”

Several superannuation and retirement groups have come out against the policy. The SMSF Association “strongly opposes” the proposal.

“At the very time retirees are looking for certainty with the superannuation system, especially considering the enormous changes that took effect on 1 July 2017, Labor’s proposal will again undermine confidence in the system and send many retirees back to the drawing board to rethink their retirement income strategies,” said Association CEO John Maroney.

“Our calculations show it will cut about $5000 of income from the median SMSF retiree earning about $50,000 a year in pension income. To be saying these people won’t be paying any more tax is just semantics.”

“This hit on retirement incomes clearly is not just affecting the very wealthy and can substantially damage the lifestyles of retirees who have prudently saved and are carefully drawing down on their retirement savings. Viewing all SMSFs as belonging to the mega-rich is an over simplification.”

Maroney said that if the change took place it would single out SMSFs as one of the few groups which would have the profits of companies they own taxed higher than their marginal tax rate. This could lead the SMSFs shifting towards investments with a higher yield, or replacing domestic shares with international equities.

“Although greater diversification may benefit funds, shifting to a greater asset allocation in foreign equities can also introduce new risks to the fund, such as foreign exchange risk.”

“This could also lead to dislocation in domestic equity markets, given the significant ownership SMSFs have of ASX listed companies. If the full value of franking credits cannot be offered to these investors, then it is logical that they will no longer value their investments as they do now.”

National Seniors says the proposal could “backfire”, hurting many recipients of the full and part Age Pension who have been encouraged to diversify their savings into shares.

Chief Advocate Ian Henschke said the organisation was concerned the change would negatively impact low and middle income earners.

“Under this proposal, a pensioner who has decided to put some money into bank shares rather than the bank itself who receives $100 in dividends will now only receive $70,” Mr Henschke said.

“This change could affect their retirement plans and the sharemarket in general.”

“The present system has been in operation since 2001 and many people have made their decisions about their retirement based on income from shares.

“There is no doubt if such a change is made, it will negatively impact many more people than the ‘very rich’ it’s aimed at. It will be felt most by those of modest means.”

ASFA also says stopping refunds of franking credits will erode retirement incomes.

“As always, the devil is in the detail and there is potential for a number of unintended consequences, depending on how the mechanism is designed, with the most important question being the impact on retirement incomes,” said a statement by ASFA.

“There are a range of critical questions which need to be addressed, including whether the proposal would drive a bias to certain asset classes or distort the system in other ways.”

However Industry Super Australia (ISA) is supportive of the change, depending on where the additional revenue is directed.

ISA said the policy would have “little or not impact” on the superannuation of most Australians, and the revenue could be re-invested to modernise the super system.

ISA CEO David Whiteley said the proposal was sensible, and could improve fairness in the super system.

“Super funds where most Australians have their retirement savings will be largely unaffected by this proposal because the imputation credits are exhausted offsetting tax liabilities of the fund,” he said.

“It has been evident for several years that policy changes are needed to modernise the super system. There is a need to make the system fairer and by reducing reliance on the aged pension, more economically sustainable.”

“Currently, at retirement age, the super savings gap between women and men on the same salary is 47.4 per cent. This gender super gap must be addressed as a result of this policy proposal.”

Industry Super Australia is calling for the $450 threshold for Super Guarantee to be abolished, super to be paid on parental leave and accelerating the timetable for 12% Super Guarantee, among other changes.

Originally published as: 200,000 SMSFs to be hit by ALP policy to stop imputation credit refunds

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