Four SMSF strategies if imputation credits rules change


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.

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29 Responses to Four SMSF strategies if imputation credits rules change

  1. Michael Savery May 17, 2018 at 11:31 AM #

    A strategy I am considering is rolling back my income steam to accumulation. While the tax outcome will be the same for me, due to surplus franking credits in both scenarios, more money will be retained in super rather than outside.

    • Jack May 17, 2018 at 2:05 PM #

      In pension phase the mandatory minimum pension is set by your age, rising from 4% at at age 55 to 14% at age 95. This has the effect of forcing you to remove capital from your pension fund because the income produced by the fund will eventually be insufficient to pay these minimum withdrawals, which must be in cash. The purpose and effect of these mandatory withdrawals is to remove money from super where it will be then exposed to normal tax and also to reduce the tax-advantaged super inherited by your beneficiaries.

      In accumulation phase you are not required to take a minimum amount, you can take as much or as little as you want, when you want, after you reach your preservation age . In accumulation phase is possible that your super balance could continue to grow during your lifetime, even with a 15% tax on earnings. I think the next thing will be a death tax to recoup some some of this tax-advantaged growth.

      Mandatory pensions were always the trade-off for the tax-free earnings in pension phase – if pension earnings are no longer tax-free, why would you accept the mandatory removal of money from super? If you are going to lose your franking credits anyway then moving from pension to accumulation seems to be a viable option.

  2. John Wilson May 17, 2018 at 11:42 AM #

    I’m puzzled by the fourth option, of adding members in accumulation mode to use excess franking from those in pension mode. It’s my understanding that all components of income, such as dividends/franking/CGT/costs other than tax are pro-rated to individual member’s holding and not selectively allocated to where they can best be used. Am I wrong?

    • Michael Hutton May 17, 2018 at 3:04 PM #

      It is correct that the income is pro rated across the members. However when it comes to the calculation of net tax payable, the total imputation credits are deducted from the total tax otherwise payable. So the tax credits can potentially be used up by the accumulation members.

  3. Greg May 17, 2018 at 12:31 PM #

    Has any modelling been completed on the behavioural response to these changes. Surely this would reduce the anticipated revenue raised significantly.

  4. Graham Hand May 17, 2018 at 12:48 PM #

    Hi Greg, there has been some work done, as reported today in the AFR, estimating behaviour changes will result in $550 million less.

    “Labor’s franking credit policy will raise $550 million a year less than what Bill Shorten anticipates because of changes in investor behaviour, claims an alliance of shareholders, seniors and self-managed retirees.

    The grand alliance, which includes the Australian Shareholders’ Association, National Seniors Australia and SMSF Association, cites new Rice Warner analysis that suggests revenue gains will be weaker than the $10.7 billion that Labor expects in the first two years.

    “There is going to be a strong behavioural response so I have concerns the tax revenue projections the ALP has done may not stand up,” said alliance spokeswoman Deborah Ralston, who is chair of the SMSF Association, a non-executive director with Mortgage Choice and a professorial fellow at Monash University.”

  5. Steve May 17, 2018 at 1:24 PM #

    Thanks for this article. Just some further thoughts on strategies. As we get closer to the end of this bull (US) market, consideration should be given to increasingly protect capital through interest and property investments. I have always hated the hybrid investments offered by the banks, as you have to wait till you lodge a tax return before getting the franking credits refunded. I do however like the Macquarie bank offer (MCN3) as it suggests that franking could be as low as 45%. The offer is for hybrids paying 4% over the BBSW. That seems compelling for those who are moderately taxable and worried about Labor’s shameless franking credit cash grab. The other consideration for those who have funds in accumulation mode, is (if Labor is elected and enacts this change) is to consider washing capital gains out prior to the end of the financial year to mop up excess credits. At least it will enable cost bases to be reset through a repurchase of the shares. (Be aware that the ATO sabre rattles Part IVA any time wash sales are mentioned. For me, I would say if you sell shares on the market and buy back on the market, and the ATO threatens Part IVA – I would say “fat chance” of getting a court to agree with them.)

  6. Tim May 17, 2018 at 3:36 PM #

    Could you explain Option 3? How is a “super wrap” retail fund able to refund franking credits when a SMSF cannot? Also, why wouldn’t SMSF retirees with no “exotic” investments simply close the SMSF and rollover to a low-cost industry super fund?

    • Geoff May 21, 2018 at 11:48 AM #

      Because the whole idea of a SMSF is to be in control of the investments and not pay the wages, bonuses, perks and lurks of industry super funds.In doing so the SMSF also accepts full responsibility for the gains and losses of their investments and the paperwork ensuing.

  7. Peter McDonald May 17, 2018 at 4:09 PM #

    I think the most troubling aspect of Labor’s proposal to remove franking credit refunds for SMSFs is the deliberately misleading statement by Chris Bowen of the benefits to members. Bowen knows that with the limitations on the amount that can be held in the pension phase of superfunds also limits the amount refundable but still claims that over $80,000 is refunded to wealthy retirees. He has to resort to 2014-2015 ATO figures to do this but fails to mention that from now on this is impossible under the current regulations on superannuation. Practically speaking it will be highly unlikely for any SMSF to receive even 1/4 of the amount quoted by Bowen. Why does he use obsolete statistics to support the Labor proposal? This is frankly duplicitous and we need to be deeply suspicious of why Labor needs to resort to such misleading reasoning to justify this policy position.

  8. Eric May 17, 2018 at 4:32 PM #

    You say that their policy “is squarely aimed at SMSFs, and that industry funds and retail funds will mostly be unaffected.”.

    So is Australian Super (pension phase) balance not affected by Labors proposed change?

    • Michael May 18, 2018 at 4:23 PM #


      The proposed Labor policy will apply equally to all super funds, as it should; however it will only adversely affect any fund where there is little or no taxable income eg an SMSF where all members are in pension phase (eg a retired couple where they are the only SMSF members). As there is no tax for the SMSF to pay in such circumstances, then the franking credits will no longer be refunded in cash, as they are now.

      Contrast this with a large industry or retail fund where there is lots of taxable income because there are taxable contributions as well as taxable income for accumulation members. In such circumstances, as the fund is treated as one entity for tax purposes, any franking credits generated by assets backing pensions will be able to be used to reduce the tax payable in relation to accumulation members. As these funds have huge taxable income, then none of the franking credits will be lost.

      So to answer your question, yes no change at all for large funds like AustralianSuper. I am sure that Labor are fully aware of this!

  9. Graeme May 17, 2018 at 8:31 PM #

    Only indirectly related to SMSFs, but when Forager listed they chose a trust structure over a company structure due to a superior outcome for their investors. One would assume every LIC board would be reviewing their structure if the Labor proposal became law.

  10. Chenrezig May 17, 2018 at 11:30 PM #

    Could you please explain how a ‘super wrap’ type retail fund can refund franking credits to the investor? Does the retail fund use the franking credits to offset tax payable by other investors and then use the ‘saved tax’ to compensate those have lost their excess franking credits?

    The process is not exactly transparent. Also, what happens when there is not enough ‘saved tax’ to compensate for lost franking credits?

    It seems to me the most attractive option is Option 2: invest in companies that do not pay tax in Australia. Yes, the Labour party is actively encouraging Australians to take their money out of Australia to invest in other countries!

  11. Phillip May 18, 2018 at 7:38 AM #

    As noted in the third point – what is “a ‘super wrap’ type retail fund”? Any examples would be helpful.

    • Graham Hand May 18, 2018 at 9:15 AM #

      Hi Phillip, there are numerous examples, they are offered by many large industry funds as an alternative to their clients setting up an SMSF. The underlying technology is usually provided by UBS Platform Solutions Group (a sponsor of Cuffelinks) and I will ask them to write a detailed article on how they work and who offers them. Graham

  12. Bill May 18, 2018 at 1:08 PM #

    Excellent Graham, looking forward to the article.

  13. Warren Bird May 18, 2018 at 2:08 PM #

    Your second point touches on one of the reasons why dividend imputation was introduced in the first place. Chapter 14 of the Campbell Inquiry Final Report talks about the lack of investment in shares at the time (late 1970’s/early 1980’s) by individual investors, citing the fact that income earned via shareholdings was being taxed in excess of your personal marginal tax rate because of company tax.
    Since imputation was introduced, the intended effect has taken place – people are now investing in the share market to an extent unheard of back then.
    THIS IS A GOOD THING! It provides capital to Australian companies to undertake and grow their operations; it improves the liquidity of the share market, thus making it more attractive for global investors than it used to be,which further brings in capital to help support the Australian economy.

    Sadly, you’re right Michael in pointing to a reduction in share ownership if Mr Shorten’s proposal becomes policy. Investors lose from this, but so do Australian companies and the Australian economy. It is quite simply very bad policy.

  14. SMSF May 18, 2018 at 3:29 PM #

    I receive a large refund of franking credits and will certainly be changing the way I invest and I will not pay this tax. There are also a couple of other ways of avoiding this tax, all of which will damage confidence, companies, the stock market and investment in Australia.
    Shorten is on another loser with this

  15. Ramani May 20, 2018 at 8:51 AM #

    The option of moving from a SMSF to an APRA fund such that franking credits that would be wasted in the SMSFs can soak up the fund-as-a whole tax liability would make sense, but only if the APRA fund would equitably distribute the credits so saved back to the members who gave raise to the credits in the first place.
    I would urge caution against such an automatic presumption. The black-box of calculating member earning / crediting rates (or the related unit pricing if the fund is unitised) as well as the fuzzy nature of equity among member cohorts, not to mention generic member apathy, militate against it. It would be feasible to check if the trustee would so distribute, and having confirmed it would, prosecute any failure in the new dispute resolution authority might be required. Otherwise, the SMSF members would be ‘donating’ the excess credits to other members without being aware of it, instead of the Treasury as wasted franking.
    My experience some time ago in chasing a corporate fund for refund of deferred tax debits that were no longer required on intra-fund transfer to pension mode has made me weary of taking things for granted.In the event, the fund refunded $3000 kicking and screaming at the SCT.

    • John May 20, 2018 at 1:40 PM #

      At least one large industry or retail fund will provide the required assurance in writing to those seeking to close their pension phase SMSFs in the wake of this proposed Labor action.

      This would grow FUM rapidly, as SMSFs have comparatively large balances – often a major reason they were established! As a sweetener, SMSF trustees will also be offered greater control/flexibility over how their balances are invested within the industry/retail fund.

      This will have a knock on effect to other funds as they seek to capture those SMSF assets, especially if fund directors are compensated on any basis that considers FUM.

      Consequently, Labor’s projected tax expenditure savings will come up Short(en).

      At least one of Shorten’s 25 year old “advisors” would know that, but won’t care as the primary objective was always to grow union affiliated industry funds. Any tax savings were just the icing on the cake.

  16. Marc Wigan May 20, 2018 at 1:21 PM #

    I tweeted the immediate effect of reducing Australia shareholdings and moving to offshore investments the day this was announced.Labor clearly doesnt want onshore investments into Australian companies. So be it. Ive already started to de-invest in Australia as they clearly want me to do. Cant understand why but then they ARE politicans interested only in being elected and not in the country they putatively “serve”

    Of course given the Royal Commission findings it not entirely inconceivable that there is a link between the industry super funds and this policy…as a back scratching action by the ALP.

    Certainly the professed intent rings false. So..follow the money!

    However I entirely concur- they will not get what they expect: SMSF trustees have a legal duty to minimise such impacts on their members. I wonder if Bowen has overlooked that?

  17. Chris May 20, 2018 at 11:13 PM #

    the comment in your first point, that

    “Assessable assets can be reduced, for example, by renovating the family home or taking overseas trips” is misleading.

    shortens second version of the proposed policy stated that if you were already obtaining a centre link pension on the date of his announcement then you would be able to keep your cash refund of franking credits. BUT if you were not a pensioner an that date then you will be permanently excluded from the cash refunds.

    so reducing assets will not help.

    I just miss out on obtaining a pension and if labor win the election I will lose $14000 income. if I had been less frugal with my spending I would been able to keep the refunds.

    To say I am a bit shattered is an understatement.

    • Graham Hand May 21, 2018 at 11:09 AM #

      Hi Chris, I don’t think you’re correct. The statement about already receiving a pension on date of the announcement (28 March 2018) was a reference only to SMSFs, on my reading. Labor has a ‘Pensioner Guarantee’ which protects all pensioners from the abolition of refunds except for SMSFs.

      From Chris Bowen’s website:

      “The Pensioner Guarantee means pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.

      Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

      This means that every pensioner will still be able to benefit from cash refunds.”

      • Chris May 21, 2018 at 5:04 PM #

        Thanks, Graham. I am still confused about the correct interpretation, so have rang Bowens office and will send them an email explaining my situation and hopefully get clarification straight from the horses mouth.

  18. Think May 21, 2018 at 11:54 AM #

    A comment and then 2 questions.

    To say this proposed measure largely only impacts SMSFs is far too general. If your super fund is any good (incl SMSFs), it would return excess credits to those members whose holdings created the credits. There are super funds, of all kinds, with no annual tax liability and they return the credits to the individual members where they arose. I question any super fund’s approach where they apply credits to reserves or to all members.


    In Australia’s tax system, why should the end tax amount paid on a company’s profit (paid as a dividend) be determined by who holds shares in it?

    Why is it appropriate that zero tax be paid on investment income held in the pension phase and also not when paid as a pension to someone over age 60? Why is age relevant (and why 60) to whether tax is paid?

  19. Ian May 21, 2018 at 3:26 PM #

    I have not seen this strategy mentioned, and I’m not sure why: make personal concessional contributions to super, such that the tax payable is offset by the imputation credits. I understand not everyone is allowed to or in a position to, but many are. This seems to be an alternative to a strategy others have suggested: move some pension balance to accumulation account. I’m interested in what feedback others may have on these concepts.

  20. Ramani May 21, 2018 at 7:28 PM #

    One strategy is to sell shares with franking credits before they go ex dividend and if considered worth holding, buy them back ex div. With deep-discount share-broking available, provided the company or the market does not witness undue choppiness, this would convert a revenue item into a capital item, potentially with the applicable capital gains discount. Unsure if the ATO would deem this a tax minimisation scheme (akin to bond-washing), but here the taxpayer is converting one type of taxable income into another, and if wholly in pension phase, one type of non taxable income into another.


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