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Unforeseen repercussions from Labor policy

Removing dividend imputation credit refunds could result in unintended consequences, including driving a bias to certain asset classes or distorting the system in other ways, according to several industry bodies.

In response to federal opposition leader Bill Shorten’s announcement today proposing the removal of refunds for dividend imputation credits if those credits exceeded an associated tax liability, the Association of Superannuation Funds of Australia (ASFA) urged further analysis to determine the full impact of the proposal.

“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,” ASFA chief executive Dr Martin Fahy said.

Shorten said the Parliamentary Budget Office (PBO) found the policy would affect around 200,000 of the 600,000 SMSFs in Australia, along with another 1.2 million taxpayers.

It is estimated it would save $11.4 billion in 2020/21 and 2021/22.

“If there is a concern about individuals with large retirement savings receiving the benefit of refundable imputation credits, then this would be better addressed by measures more closely linked to retirement balance,” Fahy said.

“At face value, it appears that this proposal would impact mum and dad investors both through their superannuation and through the shares they own outside of super and compromise the long-standing investment neutrality principle.”

Meanwhile, the Tax Institute pointed out Labor’s proposal should not come as a surprise, but warned it could cause temporary turbulence in the equity markets.

“It is what one could readily describe as the politically low hanging fruit – easily done with minimum legislative change, saves a bundle in revenue, some $11 billion over the 2018/19 forward estimates, and causes relatively minimal damage to Labor’s constituency,” Tax Institute senior tax counsel Professor Bob Deutsch said.

“It will however, cause some ructions – at least temporarily – as in equity markets where tax refunds of excess imputation credits have been an important part of the investment matrix for equity investors, particularly self-managed superannuation funds.”

Deutsch said this policy is yet another tax differentiator between the two main political parties, with the next election poised to be a “tax battlefield”.

The Financial Services Council (FSC) also warned of unintended consequences of the proposal, including retirees moving out of shares and into property and bonds, which could exacerbate house prices pressures or lower returns in the longer term.

FSC chief executive Sally Loane said: “The purpose of superannuation is to fund a comfortable retirement for Australians while reducing their reliance on the age pension.

“Super policy is working, it has been gradually reducing national taxpayer expenditure on the age pension, but this mooted change could put the brakes on that.”

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