Superannuation, Tax

Balance limits a solution to franking credit issue

SMSF balances, franking credits, refunds, trustees

Limits on the size of SMSF balances would reduce high levels of franking credit refunds without hurting smaller trustees.

The introduction of limits to superannuation balances would deal with concerns in relation to large SMSFs using excessive franking credit refunds without penalising many smaller fund members at the same time, according to a boutique Australian investment manager.

Speaking at a recent media briefing, Plato Investment Management managing director Don Hamson said a number of groups had suggested the reintroduction of limits on the size of an individual’s superannuation balance and that any funds above the limit would be held personally.

“Rice Warner has suggested a maximum amount in superannuation when it reaches pension phase of $3.2 million and anything above that you are forced to hold in your own name,” Hamson said.

“This approach gets back to the idea of reasonable benefit limits first introduced by Paul Keating who said superannuation is a tax-privileged vehicle and people’s natural desire would be to get as much as possible in there.”

He pointed out most of the concerns about the use of franking credits related to the largest 10 per cent of SMSFs, which also attracted more than half of the refunds for that sector of the superannuation market, compared with around 50 per cent of SMSFs which only held around $500,000.

A recent survey of Plato Investment Management clients, which attracted 1400 responses, found 60 per cent agreed a limit on superannuation balances was reasonable if they were allowed to retain franking credit refunds under that limit, he said.

By contrast, only 10 per cent of clients opted for a limit of $10,000 in franking credit refunds, while another 25 per cent of clients preferred a $15,000 limit on refunds.

Hamson said while the survey did not specify a limit, most clients saw it as the best way to retain franking credit refunds but reducing them where a fund had an excessively large balance.

“Very few of our clients have large balances and adviser practices tell us not that many people they deal with have large balances,” he said, adding the removal of franking credit refunds would be difficult for those who had built strategies around them, as well as those unable to return to work.

“This is the reason we think the grandfathered argument sounds good because it allows people to save more in their fund if they have an SMSF and want to keep it, or allows them to find the right retail or industry to retain their franking credits.”

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