Many SMSF trustees who may lose their franking credit refunds under Labor’s proposed policy are considering transferring to a large retail or even industry fund. It has become a common assumption that such a fund will give retirees access to franking credit refunds. For example, Robert Gottliebsen writing in The Australian last weekend said:
This is not correct. Some large super funds are receiving a refund that they will lose under the Labor policy. When it comes to franking credits, all public funds are not all created equally.
Why are we assuming all large funds can use the full franking credit?
Under the imputation system, the franking credits attached to a dividend can be used to offset tax payable by the recipient. For an individual, excess imputation credits can offset tax liabilities on other taxable income, including salary.
Large pooled funds with members in the accumulation phase incur a tax liability on both their assessable contributions and asset earnings. Where this tax liability is sufficient to utilise the franking credits generated by all members (including those in pension mode who pay no tax), the franking credits are fully utilised and there is no refund. Usually, the fund makes internal transfers between investment options to ensure the franking benefits go to the entitled members.
Some large funds are not in this position
There are some existing funds with a large proportion of pension phase members that already receive a refund of excess franking credits. In the future, more funds will reach this position as the population ages and more people retire. Such a fund would have less assessable contributions, especially when combined with low or negative investment returns, and the net cash refund will be lost under Labor.
In the accounts of the super fund, where once a dollar value of a tax benefit would have been added to the unit price, the loss of the franking credit will reduce the unit price and the investment return.
How does someone who is contemplating transferring to a pooled fund due to the Labor proposal know which funds are likely to be affected? The main indicator will be the proportion of accumulation phase members (and how much money they contribute and hold in the fund) relative to the retirement phase and the type of fund.
Check the fund before you switch
Unlikely to lose franking credits
A fund which attracts new, younger members as a natural part of its business ( for example Hostplus, which targets the hospitality and tourism industries and many retail wrap funds) should have a steady stream of accumulators. When it comes to Industry funds however it is important to be aware that ‘averaging’ is the norm. Effectively all credits will likely be pooled and distributed evenly (via the ‘unit share’) across members – you won’t necessarily receive your share in full.
By now most public superannuation funds have made statements on their expected treatment of franking credits under Labor. For example:
” Based on our current assessment and future projections of the HUB24 Super Fund’s tax position, we expect the HUB24 Super Fund to have enough concessional contributions and assessable income from investment earnings to absorb and utilise all the imputation credits that it may derive each year. Why? As one of the fastest growing platforms in the industry we have a large number of members who are in the accumulation phase relative to members in the retirement phase, and as a result will generally have sufficient levels of tax payable to utilise any excess imputation credits.
As tax is calculated and applied at an individual member level, those members that are in pension phase will continue to receive the full benefit of franking credits within the HUB24 Super Fund.
In summary, any SMSF trustee who plans to close their SMSF and go into a pooled fund needs to first consider the following:
1) The new fund can utilise its franking credits.
2) The structure of the fund – Many platforms offer wrap accounts where the benefits with regard to investment options are similar to SMSF
3) The broader implications. For instance if your have complex Estate Planning needs and/or you own assets in your SMSF moving to a pooled fund may not be in your best interest.
If you have an SMSF It is also important to recognise the merits of the following strategies:
- Diversification may mitigate impacts, so look for assets that provide gross income or don’t have franking credits and are taxable, for example, international shares, property, fixed interest, infrastructure assets
- Consider the merits of non-retired family members (such as adult children) joining the SMSF
- For retired SMSF members comfortable to reduce their regular pension payments, rolling an amount back to the accumulation account may no longer have the impact of increasing the funds tax bill.
- If you have assets outside of superannuation, consider the merit of qualifying for an aged pension to retain franking credits if you are just above the pension qualification threshold.
The best advice we can give is ‘to seek advice’ before taking any action – An informed decision is one you make based on knowledge and clarity. And, for now, please remember this is a proposed policy only but keep appraised of your investments.
The ALP need to get elected and then to have the proposal legislated by the parliament, further adjustments or concessions can occur before a proposal becomes law.
Components of this article were first published on https://cuffelinks.com.au/not-all-public-funds-same/.