Labor’s proposal to change the way dividend franking credits are treated has both its advocates and its critics. Some argue that the proposed changes are an issue of fairness. In my view, what is not fair is that Labor’s proposal is squarely aimed at SMSFs, and that industry funds and retail funds will mostly be unaffected.
Regardless of one’s point of view, any plan that removes imputation credit refunds will negatively impact self-funded retirees, and those hoping to become self-funded retirees, and result in them rethinking their investment strategies.
While the current proposal could impact any share investments held personally – and potentially also investments held through a family trust or investment company – SMSF members feel particularly targeted. At a time when self-funded retirees should be applauded for not relying on government support, the landscape seems to be changing. Such retirees will be penalised for their independence.
It is surprising that a tax change has been suggested that applies solely to one section of the superannuation system, but not to others. This is new and unwelcome. In the past, changes such as to contribution limits or the imposition of $1.6 million pension account balance caps have applied across the superannuation industry.
Possible strategy changes
If the changes come into effect, some SMSF members and self-funded retirees will make changes to their investment strategy to minimise their losses.
First, people will reduce their investment assets to receive both greater tax refunds and larger age pensions. The proposed change will have the greatest impact on self-funded retirees who fall just outside the assets test thresholds. A retiree who is receiving just $1 of the age pension will be entitled to both a personal tax refund or excess imputation credits and also their super pension receiving a tax refund. They will be significantly advantaged over those who fall just outside the assets test limit, which is currently $837,000 for a couple who are home owners or $556,500 for a single person home owner. Assessable assets can be reduced, for example, by renovating the family home or taking overseas trips.
Second, SMSF members will reduce their investments in Australian shares. Full imputation credits add about 1.6% to the return, and where this benefit is lost, the relative attractiveness of Australian shares as an investment sector will be diminished. International shares, cash and property may become relatively more attractive, and allocations here may increase.
Third, people will circumvent the changes by transferring the Australian shares part of a portfolio to a ‘super wrap’ type retail fund that will refund the imputation credits due on their account. These ‘member direct’ offers usually allow members to hold managed funds and shares in the S&P/ASX300.
Fourth, with the Government’s announcement to increase the maximum number of SMSF members from four to six, there will likely be more families that treat an SMSF as a true family investment vehicle. Younger family members who are accumulating super will be added to use the credits that their parents, in pension mode, may otherwise have lost.
Labor’s proposed change is unlikely to boost government revenue to the amount forecast.
Perhaps the only tangible outcome will be to continue eroding confidence in our superannuation system. It is difficult to encourage people to put more into super when the money is locked away for a long period of time and the benefits continue to be taken away. It seems that for many people, they will be better off having a lower amount in super and receive increased age pension payments in retirement.
These latest proposed changes if Labor is in government come on top of the major rejig to retirees’ investment situation resulting from the Coalition’s changes that came into effect 1 July 2017, including limitations on super contributions, the $1.6 million cap and changes to death benefit payouts, amongst other amendments.
If successive governments are looking for ways to turn people away from saving for their retirement and encouraging them to seek government assistance, they are certainly going the right way about it.
Michael Hutton is a Partner and Head of Wealth Management at HLB Mann Judd. This article is general information and does not coonsider the circumstances of any individual.