Labor’s proposal to remove cash refunds on franking credits has been criticised on many grounds, from its estimates of potential budget revenue to potentially forcing self-funded retirees into riskier investment portfolios in their search for yield to failing to consider the impact of the $1.6 million transfer balance cap that took effect from 1 July 2017.
But from the SMSF Association’s perspective, it’s the sheer breadth of those potentially affected by this proposal that is cause for greatest concern. Listen to the Labor Party’s rhetoric and you could be forgiven for believing it will only hurt the wealthiest 10 per cent of SMSFs. The reality is far different.
Research by the Alliance for a Fairer Retirement System, a coalition of 11 organisations across investment, retiree and superannuation organisations specifically formed with the express goal of opposing this proposal, identifies six groups who will be financially hurt. They are:
- Australian shareholders on incomes less than $65,000: Shares have been a preferred saving vehicle for many Australians under the dividend imputation system. Those on incomes of less than $65,000 will be adversely affected, including 18 to 65 year olds running their own business, single parents and non-working spouses.
- Self-funded retirees: At December 2017, just over one-third of Australia’s 3.6 million retirees were self-funded, and half of these were over 70. Most of these older retirees have little if any superannuation savings. Individuals over 65 receive around half ($1.1 billion) of franking credit cash refunds going to individuals, with an average value of around $5000.
- SMSFs: Almost half of the 1.1 million SMSF trustees/members either in pension phase, or who will move into that phase soon, will be adversely affected. The pensioner exemption will apply to age pensioners in SMSFs at 28 March 2018, but not subsequently.
- Small Australian Prudential Regulation Authority (APRA)-regulated funds: Although Labor claims only 10 per cent of APRA-regulated funds would be affected by the changes, ATO data reveals 2013 of the 2603 APRA-regulated funds received franking credit refunds in 2015/16.
- Large retail APRA-regulated funds: Although Labor argues the large retail funds will not be affected, Treasury analysis reveals 50 out of 240 of the large APRA-regulated funds received refundable franking credits worth $235 million.
- Retired small business owners with equity in their companies: The proposal will hurt small business owners who derive retirement income from dividends and franking credits on the equity invested in their unlisted companies. There are about 500,000 incorporated small to medium-sized enterprises, although it is difficult to estimate how many will be affected.
In terms of the estimated number of individuals affected by the removal of franking credits, the Parliamentary Budget Office put the number at 1.26 million, broken down in the following way: member of SMSFs not in receipt of age pension or allowances, 420,000; APRA-regulated fund members, 2300; and individual taxpayers not in receipt of the age pension or allowances, 840,000.
No matter which way you cut the franking credit cake, it’s poor policy.
In the association’s opinion, that number alone is enough to condemn Labor’s proposal. But as the alliance’s research shows, it grossly under-represents the number of Australians who will fall foul of this proposal as the Parliamentary Budget Office’s estimates exclude:
- members of small APRA-regulated funds,
- members of large retail APRA-regulated funds,
- retired small business owners with equity invested in their companies, and
- Australian shareholders on incomes less than $65,000.
Whatever the final number affected – and hopefully the House of Representatives Standing Committee on Economics inquiry into the implications of removing refundable franking credits will produce a credible number – one thing is obvious already; the net is far wider than the wealthiest 10 per cent of SMSFs.
Remember too, large SMSFs with more than $1.6 million will pay tax at 15 per cent and, in many circumstances, will still receive the majority value of their franking credits as they use them to reduce tax liabilities on their accumulation earnings.
No matter which way you cut the franking credit cake, it’s poor policy. Labor needs to go back to the drawing board with this proposal.