Regulation, SMSF, Tax

Imputation system changes bad for SMSFs

Franking credits

The proposed changes to the franking credits regime could have a significant impact on trustees who rely on the credits to benefit from lower taxation rates offered by their SMSFs.

The government’s proposal to amend the franking credits attached to dividends funded by capital raising activities will impact SMSF trustees and pose challenges for the industry as a whole, according to a mid-tier accounting firm senior executive.

“If the amendment comes through, it will definitely create concerns for our clients as many of them use SMSFs because it’s a vehicle with a low tax rate,” HLB Mann Judd Sydney superannuation director Andrew Yee told selfmanagedsuper.

He specifically pointed out the inclusion of schedule 5 in the proposal would have the greatest impact on the industry. This schedule stipulates dividends funded by capital raising activities and paid outside of regular intervals, such as during a merger or takeover, could potentially be classified as unfrankable.

“When you’ve got these corporate actions, the deal requires or provides the benefit of having a large proportion of the consideration in the form of a fully franked dividend with the capital protion being a smaller amount,” he noted.

“If the government doesn’t allow companies to have the capital component be so low and the dividend component so high, it will end up creating a bit of a stir because many people have become used to that type of arrangement. And these types of corporate actions have become increasingly restricted over the years.

“I can see where the government is coming from because it’s another way of protecting their revenue or raising more revenue but the proposed changes aren’t going to be good for SMSF trustees who are used to these large refunds year-on-year.

“Franking credits provide a benefit in the form of a refund and generate significant cash flow for self-managed super funds, especially if those members are already in the pension phase.

“If the government is planning to put in new laws restricting that benefit, or limit the amount of imputation credits that can be refunded, it will have a huge impact,” he predicted.

Yee acknowledged if these types of restrictions are introduced concerns will be raised not only among the SMSF sector but also in the superannuation industry in general and the greater Australian share market.

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