If the Labor Governments proposed legislation to limit the refunding of franking credits is passed, it will have a significant impact on retirement savings.
According to Plato Investment Management’s managing director Dr Don Hamson, while the changes are aimed at Self-managed super funds (SMSFs), all investors need to consider how they’re affected in their existing superannuation vehicle.
Franking credits are paid to shareholders to account for tax paid at the corporate level.
For people who pay little or no tax, such as super funds and retirees, excess credits are paid out as refunds.
If these refunds are scrapped, the worst-case scenario for an investor is someone with all their super assets sitting in equities that pay franked dividends.
“It’s bad luck if you’re an investor going forward because all your franking is going to be worthless inside a pension phase SMSF,” said Dr Hamson.
While carve outs have since been issued by Labor for pensioners and SMSF’s with at least one pensioner member, the percentage of pensioners in a fund will impact how much it is affected.
Speaking at the recent Paragem Professional Development Day in Sydney, Dr Hamson
warned: “Pension phase SMSFs become very unattractive if this legislation is introduced.”
This is because larger super funds may be able to offset the impact of the changes using the different dynamics in their memberships, while this is more difficult for a SMSF with fewer members.
One of the strategies explored by Dr Hamson to reduce the impact of the proposed changes is the transfer of an investor’s Australian equities exposure out of a SMSF to a vehicle such as a super fund or a super fund on a platform that is not impacted by the proposed changes.
Alternatively, investing in a super fund with younger members and fewer pensioners could reduce the impact in the short term, however over the long term, all of the member bases of these products are getting older.