The Labor Party’s proposal to ban imputation credit refunds for certain retirees risks disrupting the economy if SMSF investors choose to move into debt for company capital formation instead of investing in equities, according to an SMSF executive.
SuperConcepts SMSF technical and private wealth executive manager Graeme Colley told selfmanagedsuper Australia is one of the few countries in the world where companies engage in capital formation through investing in equities, whereas countries such as the United States favour debt for capital raising.
“Do we want companies to go into that?” Colley said.
“Debt is far more expensive because you’ve got to pay interest rates and interest rates fluctuate, whereas with equities, dividends coming up from equity raising are roughly about 3 or 4 per cent anyway in the long term.”
He said he does not believe SMSF investors will exit domestic shares and flock to international shares as this would involve taking on currency risk.
“The Australian dollar is low at the moment. When the dollar appreciates you’ve got international currencies then that will have their relative value decrease,” he said.
Colley’s own calculations at the end of 2018 showed an investor with a super balance of $1 million who has allocated 70 per cent of their portfolio to equities will have accumulated twice the amount in their 70s and 80s with franking dividends than what they would have without them.
An investor who misses out on franking credit refunds would have accumulated around half or two-thirds of that balance, he noted.
“You’ve got the possibility, in the longer term, of people wanting to draw down on the social security system,” he said.
“The long-term impact can be the government actually paying for the lack of franking credits. What you’re probably doing is deferring the tax break. You get a refund of the franking credits, that’s an upfront thing, but in the longer term you end up with the possibility of the government ending up paying our social security benefits.”