A fund manager has proposed the implementation of caps on maximum franking credit refunds per person as an alternative solution to scrapping the refunds altogether.
Plato Investment Management said it believes Labor’s policy proposal to remove refundable franking credits requires amendment either through introducing caps or other measures.
“Perhaps a better way to eliminate the few extremely large franking credit refunds would be either to limit the total amount people can invest into super or limit the maximum franking credit refund per person,” Plato managing director Don Hamson said.
Hamson also presented Plato research that suggests the policy, if implemented in its current form, would affect not just SMSFs, but also Australian Prudential Regulation Authority-regulated funds, including retail and industry super funds.
“As the superannuation industry matures and more members move to pension mode, we believe this proposal may represent a ticking time bomb for the whole superannuation industry,” he said.
He added any super fund with a large proportion of pension-phase investors may currently be receiving a net refund of franking credits.
“The likelihood and size of franking credit refunds is also related to the amount of franking generated (higher), the level of total taxable income (lower) and the level of contributions tax paid by accumulation members (lower),” he said.
“When investment returns are low, reducing taxable income, a higher percentage of superannuation funds may miss out on some or all of their franking credits, exacerbating the low investment returns.”
He said an investor’s ability to access franking credits will depend on their retirement investments and how they invest under the proposal.
Advisers should ask if their clients’ SMSF or super fund will lose net franking credit refunds if the proposal becomes policy, he suggested.