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Superannuation, Tax

Labor policy scraps tax equality

Labor's move to remove franking credit refunds scraps the idea of tax equality.

The SMSF Association has accused the Labor Party of distorting the key tax principle of horizontal equity and unfairly targeting SMSFs via its proposed policy to ban franking credit refunds for some individuals.

During its address to the House of Representatives Standing Committee on Economics inquiry into the implications of removing refundable franking credits in Adelaide today, the industry body declared the proposal will specifically have a negative impact on SMSF members compared to those individuals in public offer funds.

“SMSF members in retirement phase will generally lose the benefit of franking credits if they are not refundable, while large superannuation funds can ensure that the full value of franking credits received are utilised against income derived by younger members still in accumulation phase,” SMSF Association chief executive John Maroney told the committee.

“Therefore, an individual in retirement phase in a large superannuation fund with the same balance and same allocation to listed equities as an individual in an SMSF will be substantially better off by still receiving the full benefit of franking credits. This is a clear departure from the principle of horizontal equity in the taxation system.

“The change would single out SMSF members as one of the few groups of taxpayers who will have the profits of companies they own taxed higher than their marginal tax rate. Instead, SMSF members in retirement phase will have company tax paid on their share of a company’s profits when none should be paid.”

According to Maroney, the move would also introduce more budgetary pressure because, under the policy, the drawdown of capital would be encouraged, which in turn would result in a great reliance on the age pension.

“The retirement income incentive for a home-owning couple to save upwards of $850,000 is now severely reduced under the non-refundable franking credit proposal,” he said.

“This is because, from an income perspective, such a couple may be better off with less assets, a part-age pension and refundable franking credits. It actively discourages people from saving for a self-sufficient retirement.”

In addition, he pointed out the policy would be less likely to hit the SMSFs Labor has targeted, being funds with over $2.4 million in assets.

“These funds will still be able to use franking credits to offset tax they pay on superannuation fund earnings related to assets over the $1.6 million transfer balance cap that has been in place since 1 July 2017,” he said.

“SMSFs with assets below $1.6 million, whose members have worked hard to provide for a reasonable retirement and do not receive the age pension, will lose 100 per cent of their franking credit refunds and about 10 per cent of their income.”

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