Those with long memories will recall pre-16 February 1990 rollover balances.
The purpose of that policy was to prevent larger employer termination and other benefits rolled over to a super fund or approved deposit fund from ever being counted towards a person’s reasonable benefit limit if rolled over before that date.
These were very politically expedient policy positions and were put in place because the Hawke-Keating government was heading to a March election and was looking to clear the decks and remove anything that might cause campaign problems.
This policy often caused great practical confusion. But politically it worked because no one was able to say older Australians had not been protected from tax rules that were neither well known nor understood.
During the mid-1980s and early 1990s, the Labor government had a tendency of creating grandfathered rules. In fact, the Australian retirement income regulatory environment was saturated with strange grandfathering rules. Some of them survive to this day.
And if Labor wins the next election – a distinct possibility if you believe published opinion polls, but clearly not a certainty – then based on their amended imputation policy we will have a return to a strange grandfathered rule.
The revised imputation policy introduces a pensioner guarantee. The policy document says “self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes”, and will be allowed a full refund of franking credits.
How will this be practically administered?
It’s hard to say. Presumably the Department of Human Services will need to track a pension’s status and report this to the ATO via data-sharing arrangements. And SMSF administrators will need to store this data and put it on one or more SMSF annual returns.
At a practical level it doesn’t seem logical that someone retiring on 28 March 2018 or later and in an SMSF and receiving an age pension from their first day of retirement can’t receive a refund of franking credits while someone who retired on 25 March is eligible for this refund.
And what happens if an SMSF satisfies this rule – that is, the fund had an age pension or allowance recipient before 28 March – but that member is no longer in the fund because they voluntarily left or died? Will such funds be forever exempt?
A further example: someone retired three years ago with money in an SMSF, was an aged pensioner but lost it because of the income and/or assets test, but became eligible again after 27 March. Presumably because they had been a recipient before 28 March, then franking credit refunds will be fully available.
What about an age pensioner who retired before 28 March and elected to move money from an Australian Prudential Regulation Authority (APRA)-regulated fund to an SMSF? They would move from an entity that uses all franking credits to one that cannot. Hard to argue this isn’t unfair.
And why are those who have received large compensation payments because of severe injuries or are unable to work because of medical incapacity and receiving disability super pensions ineligible for the full refund, full stop?
It would be a surprise if there wasn’t some further fine-tuning to this measure to smooth out some of the obvious problems.
But if this policy survives, then pre-28 March pensioners and their SMSFs will become highly valuable. And this date in the superannuation industry will become legendary – perhaps for all the wrong reasons.
Winners and losers
It seems clear the winners of this policy are:
those in APRA funds that can fully use all franking credits against other income (however, not all APRA funds will be able to achieve full use of these credits now and into the future),
SMSFs that have members who receive Centrelink benefits before 28 March, and
very high net worth individuals who will be able to soak up franking credits in their SMSF with taxable income on non-pension assets.
The losers? This is anyone who doesn’t fit into the above buckets. In broad terms it’s:
those who retire after 27 March 2018 and are in an SMSF with no Centrelink recipient just before Easter 2018, and
those who retire before 28 March but failed the Centrelink income or assets tests and have less than about $10 million in super, depending on asset allocation.