Superannuation, Tax

Franking credit removal will create two SMSF classes

The Self-managed Independent Superannuation Funds Association (SISFA) has predicted the possibility of the creation of two classes of SMSFs if franking credits are removed.

Addressing the House of Representatives Standing Committee on Economics inquiry into the implications of removing refundable franking credits, SISFA managing director Michael Lorimer said the two classes of SMSFs would be dictated by those funds that had a member in pension phase before 28 March 2018 and those funds that drew a pension after that date.

Lorimer told the committee hearing the proposed franking credit changes would create a carveout where some funds would benefit from refundable franking credits into the future, while others would not due to selective policymaking that targeted SMSFs.

“There’s going to be a new class of SMSF, so those who had an age pension at a particular date would be carved out and would benefit from refundable franking credits into the future. Even if that person or persons ceased to be eligible, the fund itself would be protected. Individuals, on the other hand, would not be protected. They could fall in and out of the system deliberately or not deliberately,” he said.

Lorimer pointed out SISFA has strongly opposed the removal of franking credits as a refundable tax offset proposed by the Labor Party, adding “this is for the primary reason that the proposal in its current form at least is a targeted or selective removal only applying to certain individuals and superannuation funds”.

“It’s what we’d consider to be an example of silo-based policymaking which instead needs to be done in the context of a much wider review of broader income tax superannuation and social security considerations,” he said.

According to SISFA, removal of franking credits would lead to inconsistent, unfair or anomalous outcomes between particular classes of shareholders in Australian companies.

Investors other than age pensioners or recipients of other stated entitlements with a tax rate under 30 per cent would also be affected by the measure.

Citing an example, Lorimer said: “A self-managed superannuation fund with at least one age pensioner as a member just before 28 March 2018 who would still be eligible for a refund of excess franking credits. Another potentially identical self-managed superannuation fund with similar or the same assets, but with the member becoming eligible for the age pension after that date would not be entitled to refundable credits. That just makes no sense. It’s totally arbitrary.”

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