A reader, Ian, wrote to us:
“An AFR article on 16-17 February, page 30, by John Wasiliev called ‘How franking would work on industry fund options’ says a direct share option in an industry fund is not part of the overall pool and therefore cannot use excess franking credits. I can’t work out if this is right.”
The relevant section from the AFR said:
“But when a member elects to make their own investment choice under a direct investment option that allows them to invest directly in any shares from the top 300 companies on the stock exchange, for example, they are no longer under the “pooled” fund.
They are instead invested as an individual on a separate platform where all dividends, imputation credits and tax liabilities are applied to that individual’s portfolio. A platform is an online service that collects and displays information about investments.”
Clarification by AustralianSuper
Cuffelinks previously addressed this issue in June 2018 with an article by Tom Garcia of AustralianSuper, saying that franking credit refunds should remain available. This week, Tom confirmed the position, and anyone who wants the full explanation should read the original. The most relevant part for franking credits is:
“How are franking credits managed and how might Labor’s proposed changes affect members?
Based on announcements that have been made to date, the impact of Labor’s proposed changes differs according to the tax-paying status of each superannuation vehicle.
AustralianSuper is a single taxpayer which pays tax at the entity level rather than the individual member level. It pays a significant amount of tax on its contributions and investment income derived from assets that support member balances in the accumulation phase.
The Fund uses its total franking credits to offset the total tax liabilities it pays. It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits.
While the Fund remains a significant taxpayer, the proposed changes are not likely to materially impact investment returns. By contrast, other funds that have low or no investment income taxed in the accumulation phase, low or no taxable contributions and have a high exposure to Australian equities are more likely to be negatively impacted by the proposed changes.”
QSuper announcement has the same outcome
As a further check, QSuper has this on its website relating to its equivalent of a ‘direct investment’ offer, called ‘Self-invest’. In answering questions on the impact of Labor’s franking credit policy, QSuper says:
“Will I be impacted?
No. The proposal impacts taxpayers who haven’t paid any tax. Because QSuper pays tax each year, based on what is currently known this proposal is unlikely to impact QSuper or our members. Even if your income account is not paying income tax, QSuper is a taxpayer and can take full advantage of the franking credit.
Will I lose any franking credit benefits?
No. QSuper will still receive the benefit of franking credits when determining unit prices. Remember the proposal is not changing franking credits, rather stopping a cash refund for those who haven’t paid tax.
I have Self-invest. Will I be impacted?
No, for the same reasons as above, QSuper is a taxpayer.”
Graham Hand is Managing Editor of Cuffelinks. Readers should obtain their own financial advice relating to the issues in this article. As we have written in other articles, not all public funds are the same.