Retirees find a way to dodge franking credit crackdown

Australian Opposition Leader Bill Shorten. Picture: AAP
Australian Opposition Leader Bill Shorten. Picture: AAP

Retirees with self-managed super funds could dodge Bill Shorten’s franking credit crackdown by shifting Australian equities into bank-run retail or industry funds that are in a “net tax” position, potentially blowing a hole in Labor’s $56 billion revenue projections.

Analysis from investment bank Citi found there could be between $14bn and $35bn in savings ­moving from privately held self-­managed superannuation funds on to retail wealth investment platforms as retirees attempt to avoid Labor’s ban on excess franking credit refunds.

Parliamentary Budget Office figures suggest there are more than 200,000 SMSFs that could be impacted by the opposition proposal, which is expected to recoup about $6bn a year in lost revenue by ending the excess refunds that are paid when franking credits are in excess of a shareholder’s tax liability. About 35 per cent of all SMSFs are expected to be impacted by the proposals.

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Because super funds pay tax on contributions and investment income, generally at about 15 per cent, the entities are able to use franking credits to offset their tax liabilities.

According to the latest figures from the Australian Prudential Regulation Authority, most retail funds generate enough income and receive enough contributions to generate a sizeable tax liability, which allows them to offset that liability with franking credits.

Citi analyst Siraj Ahmed said Labor’s policy could result in an “arbitrage” where union-and-­employer-backed industry funds and retail super funds that have enough younger members in the accumulation phase continue to keep excess franking credits.

“To minimise the impact of the policy change, one of the options available for an existing SMSF in a net refund position is to move its assets or at least the Australian shares portion of the SMSF to a retail or industry super fund in a net tax position,” Mr Ahmed said.

“The arbitrage exists because the entire fund is a single tax payer and could use franking credits to offset tax payable from contributions and investment earnings for members in accumulation phase.

“If the fund applies the franking credit benefit at an individual member level, members in a pension phase could continue to receive the full benefit of franking credits.”

The industry fund sector could be the biggest beneficiary from behavioural changes responding to the policy as they typically have younger members. Commonwealth Bank’s Colonial First State FirstWrap fund is expected to be in a net refund position and Labor’s policy would result in a loss of ­excess franking credits.

The Financial Services Council found in the 2016 financial year, excess cash refunds were worth $235 million to large super funds, with 50 funds receiving refunds.

The FSC contends that if retirees received the benefit of franking credit refunds, their average benefit was $850 a year.

SMSF owners could also add their children into the trust structure to offset the low-tax position of retired members in the fund. More than 90 per cent of SMSFs have either one or two members. If retirees include their children in the trust, it could result in a tax liability, which would allow franking credit income to continue.

REPORTER
Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.