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Labor’s franking policy is a ticking bomb for all super funds

The Australian Labor Party (ALP) proposal to limit cash refunds of franking credits will clearly impact many pension phase SMSFs, but we believe it also has the potential to impact many other superannuation funds.

In this paper, we build a model of the key variables which determine whether a superannuation fund is likely to lose refunds of net franking credits under the ALP proposal. Our model is consistent with and helps explain an article in The Australian which reported that $309 million in franking credit refunds were paid to over 2000 APRA-regulated superannuation funds, including 50 (out of a total of 240) large APRA funds, in 2015-16, impacting 2.6 million member accounts.

The ALP proposal

On 13 March 2018, the ALP announced a proposal to abolish the net refunding of franking credits to Australian investors other than for charities and endowments. The initial proposal was expected to impact 1.17 million individuals and superannuation funds and generate $59 billion in government savings over 10 years.

On 26 March, the ALP revised their proposal in the light of significant public criticism. Direct investments by welfare pensioners (part and full aged, disability and other Centrelink pensions) were also excluded, ensuring 306,000 pensioners will continue to receive cash refunds. SMSFs are also exempt if they had at least one welfare pensioner before 28 March 2018. Our understanding is this exemption does not apply to other superannuation funds.

Which super funds are affected?

Note that franking credits themselves are not abolished. Australian investors can continue to use franking credits to offset income tax payable and for a superannuation fund, contributions tax payable.

The ALP believes the main superannuation funds impacted by this proposal will be pension phase SMSFs. However, ATO taxation data (as quoted in The Australian) and analysis of APRA statistics show that many APRA-regulated funds will likely also be affected. This implies the impact may be far broader than initially predicted.

Analysis of key drivers (to losing franking credit refunds) and their potential magnitude.

Franking credits will be lost if total tax payable by a superannuation fund is less than franking credits received. Tax payable is a function of tax on investment earnings on the accumulation portion of a fund, as well as contributions tax payable on normal contributions. The percentage of pension phase assets, the level of taxable earnings and the level of contributions will vary from fund to fund and may vary from year to year.

For example, taxable investment earnings will be largely determined by the state of investment markets. The level of franking credits can also vary between funds and over time. We base our estimate of the typical impact of imputation assuming an average SMSF exposure to Australian shares based on March 2018 ATO statistics of 31%, and the franking credit yield of the S&P/ASX200 Index which has averaged approximately 1.5% pa over the 10 years to December 2017.

Investors with higher allocations to Australian shares, or allocations to higher-yielding Australian shares could earn even higher levels of franking credits. They stand to lose more if franking credit refunds are denied. In our analysis we double the level of franking credits in our high-franking scenario.

Loss of refunds depends on pension v accumulation and franking levels 

We then varied the proportion of a superannuation fund devoted to pension and accumulation as well as the levels of franking credits, contributions tax and taxable income [1].

Figure 1 illustrates the outcome of our sensitivity analysis varying the proportion of pension assets and the level of franking credits.

Clearly funds with 100% pension assets will lose all their franking credits. We estimate that for a typical level of franking credits, funds with 70% or less in pension assets should not expect to lose franking credits. For funds with double the typical level of franking credits, this number drops to 50%.

If accumulation phase (or 15% taxed) members aren’t paying contributions and therefore aren’t paying contributions tax, funds are more likely to lose franking credits. Funds with higher levels of taxable income would be less likely to lose franking credits. Higher levels of taxable income are usually associated with strong markets or the realisation of capital gains.

The number of funds impacted will vary from year to year in response to the level of investment returns. When investment returns are very low or negative, tax on investment earnings will also be low, increasing the chance that the value of franking credits received by a fund exceeds tax payable.

Accordingly, when investment returns are low, a higher percentage of superannuation funds may miss out on some or all of their franking credits, exacerbating the low investment returns.

The winners and the losers

We find that the loss of franking credits is likely to be positively related to:

1) The percentage of assets in pension, with maximum loss at 100% pension assets, but losses starting to occur from 50% to 70% pension assets

2) The level of franking credits generated by the underlying assets (the more franking credits generated the more likely you are to lose some).

The loss will be negatively related to:

3) The level of taxable income generated from the underlying assets (with losses in franking credits more likely in periods of weak investment markets meaning investors may receive a double hit to returns)

4) The level of contributions and contributions tax payable by accumulation members (the less contributions tax payable the more likely a fund loses franking credits).

Our model explains why The Australian reported that 50 large APRA-regulated superannuation funds (out of 240) received net refunds of franking credits in the 2015/16 tax year.

Mature funds may suffer most from loss of refund

Our scenario analysis finds that any relatively mature superannuation fund, where maturity is defined by the percentage of member balances in pension mode, may be in a net franking credit refund position.

While many SMSF members have been vocal critics of this proposal, we believe members of other superannuation funds probably don’t even know they receive franking credit refunds (they are not reported on investment summaries) and probably won’t know whether they might miss out on franking credits should this proposal be enacted.

Finally, we believe that as the superannuation industry matures as a whole, as more members migrate to pension status, the loss of franking credit refunds will impact a growing number of people, be they members of government, industry, retail or SMSFs.

As such we believe this proposal may represent a ticking time bomb for the whole superannuation industry.

This article was authored by Dr Don Hamson. Dr Don Hamson is Managing Director at Plato Investment Management Limited. This article is for general information only and does not take account of any person’s financial circumstances.

1. We vary pension proportions in rests of 10% from 0% to 100%. For franking credits we used a normal level of franking credits as discussed above and then we doubled the level of franking credits to reflect a higher exposure to Australian shares and/or a higher franking yield from the Australian portfolios. We use two levels of contributions – none (reflecting for instance pension phase SMSF with greater than $1.6 million balances per member) and 7% of the accumulation balance which attract contributions tax of 15%. Similarly, we varied the taxable income level which can be caused by (for instance) realisation of capital gains. Full details of our assumptions are available on request.

Active Investment Success Relies on Finding a Top Personal “Trainer” to do the Heavy Lifting

A mate recently cancelled his gym membership at a popular city health club, citing lack of motivation, high monthly fees and a general malaise about “just not getting results’’.

Out of interest, I asked him what his training regime looked like.

A brisk walk on the treadmill, he confessed, followed by a quick sauna and an obligatory large iced-coffee (with cream and ice-cream) in the club lounge afterwards.

Those stubborn kilos are still hanging on for dear life.

Comparisons can be drawn between my friend’s story and the heated – often hysterical – active versus passive investment debate dominating financial news headlines in recent months.

Proponents of active investment, quite rightly, argue for its superior ability to outperform the market over the long-term, with astute investor-led analysis and individual market research informing which stocks to include in any given portfolio. But active management is far more than just stock picking and here lies the often unseen value. Active management utilises all the tools available to achieve a tailored outcome for investors; asset allocation that considers the return you need at the risk you can live with, dynamic management to help avoid downside risk and ‘smooth’ the ride, precise factor exposures and even tax strategy – there is no one right way to invest for everyone. Each investor has a unique set of goals, real-world constraints and risk preferences.

This is contrary to passive investing, which follows the index, relies on trends and is often based on exchange-traded funds.

The Australian market is dominated by two sectors – banks and resources. And the top 20 Australian-listed companies account for 47% ($804 billion) of ASX200, leaving the remaining 180 stocks to make-up the remaining $900 billion.

The inherent risk with a passive Australian shares strategy tracking the S&P/ASX 200 Index is that it will overweight companies that have gone up in price and, therefore, have greater representation in the Index. So, when they fall, the portfolio hangs on for the ride from the peak to the trough – with painful consequences for total returns.

The bottom line is – markets are cyclical, what is winning today could lose tomorrow.

A philosophy that rewards past performance at the expense of future prediction isn’t an intelligent, strategic approach to creating wealth.

Also, it’s important to understand the distinction between cost and value. There is no disputing that passive strategies typically have lower fees and have done a good job of beating ‘average active managers’ (their term not ours). The key word here is average – an average manager will probably deliver average results. Our advice is to only use an excellent active manager – one who has the runs on the board, with a disciplined and robust process that is bigger than any key individual and will endure beyond the current group of people.

Find an active manager who reports their fees. Transparency is king when it comes to trust and building strong long-term relationships.

Warren Buffett once put it simply.

I just advise looking at as many things as possible and you will find some bargains. And when you find them you have to act, Buffet said.

The world isn’t going to tell you about great deals, you have to find them yourself and that takes a fair amount of time.”

The prevailing truth is that price doesn’t dictate a great company. Good investors must do proper due diligence in determining whether, firstly, they’ve found a great company and, secondly, if it’s a great company at a great price i.e. it can be a great company but the price might already reflect that in which case it is not a bargain.

There are no shortcuts. This takes thousands of hours of quantitative research, face-to-face meetings, stress testing analogies and scrutinising their balance sheets, and ongoing monitoring.

That’s the beauty of astute, wise and experienced (‘above average’) managers, they invest their time, energy, experience and the muscle to do the heavy lifting for their clients and the results speak for themselves.

Here at FinSec building sustained long-term wealth for people is at the core of ‘why we do what we do’. And, although no investment manager can ever promise they will always beat the market (if they do, run in the opposite direction) long-term wealth is only achieved with a smart, strategic and transparent investment policy and an in-house investment committee accountable to it.

It’s an approach any ‘above average’ manager should be able to prove and is best illustrated by an example of our own performance plotted below.  (Blue line is the index compared with FinSec’s performance represented by the red balls).


* FinSec Partners performance compared with index June 2010 – July 2017

Which brings me back to my mate.

Him not shedding his winter weight, of course, wasn’t the gym’s fault.

He just didn’t have the right training schedule and he could have done with the disciplined, rigorous support of a qualified and experienced personal trainer who knew how to get the best out of him to enable him to achieve his goals.

SMSFs gear up for advice


Advised self-managed superannuation fund (SMSF) trustees are more confident about achieving their desired retirement income than non-trustees, according to research commissioned by nabtrade and the SMSF Association.

The research says about 53% of SMSF trustees are more likely to be receiving financial advice than non-trustees (about 30%). Illustrating the value of financial advice, about 72% of advised trustees are confident of being on track to achieve their desired retirement income as opposed to 66% of non-trustees.

According to the Intimate with Self-Managed Superannuation report, there is a continued move by trustees from the “do-it myself” culture to a “help me do it” approach. NAB head of SMSF solutions Gemma Dale said SMSF trustees taking an active role in managing their savings helps ensure continued confidence.

“As we’ve seen over the last decade, SMSFs are not a flash in the pan. As these preliminary findings show, SMSF trustees continue to show a preference for direct investment and are looking for prudent ways to manage risk in uncertain times,” Dale said.

“While Australian shares and cash continue to dominate portfolios, low interest rates are driving interest in asset classes outside of cash, such as fixed interest and international shares.”

SMSF Association chief executive Andrea Slattery said another interesting finding was the focus on risk by those trustees who understand their SMSF investment strategy.

“The most commonly cited factors in developing the strategy are the overall risk of the portfolio (65.8%), diversification of the fund’s investments (63.4%), and the risk of the fund’s investments (61.6%),” Slattery said.

“The prevailing attitude of de-risking is evident among trustees who allocate at least 10 per cent of their SMSF to cash, the asset class that is universally perceived as less risky.”

The research was conducted between November and December 2014 with 468 SMSF trustees and 532 APRA fund members surveyed.

Article first appeared in the Financial Standard, Monday 13th July 2015

SPAA Changes It’s Name

SPAA self managed super fund association

It is no secret that the SMSF sector is evolving at an ever increasing pace, SMSF is now the largest super sector in terms of asset size, boast around one million trustees and the breadth of it’s professional membership is growing exponentially.

Today the professional body tasked with leading the SMSF sector has changed it’s name from SMSF Professionals’ Association of Australia Limited (SPAA), to the SMSF Association, in a move thought to better reflect the growing growing sector and vibrancy of the organisation.

The simpler name is more intuitive and will cause less confusion within the SMSF community, in particular trustees who will now have a clearer path to accessing the best professional advice.

For further information regarding the name change, please view the following resources;

Number of SMSF members tops one million


It’s official. The numbers of SMSF members has now topped one million, according to the Australian Taxation Office’s March 2014 SMSF statistical report.

The report shows the number of SMSF members at 1,006,975 – a net gain of 11,384 compared with the 31 December 2013 figure of 995,591. Over the past four years the number of members has increased 26.6% from 795,563 at 31 March 2010.

Over the same three-month period to 31 March 2014, the net establishment of SMSFs was 6374, taking the number of funds to 528,701. Over the four-year period net establishments have risen 26.5% from 417,862 at 31 March 2010.

The SMSF Professionals’ Association of Australia (SPAA) CEO Andrea Slattery says: “The number of trustees and members exceeding one million is an important milestone for the SMSF industry, clearly demonstrating that there is a growing number of people wanting to take direct responsibility for their retirement savings.

“It now compels everyone involved in the industry to ensure that these trustees and members have access to the best professional advice, and certainly SPAA is committed to this outcome.”

She says that although the figures show that while number of SMSF establishments continues to grow, the pace of growth is softening.

“SPAA is encouraged by this trend. It suggests that people are only opting for an SMSF after doing their due diligence and deciding whether an SMSF is the appropriate retirement savings vehicle for them. As such, SPAA believes this growth is sustainable over the longer term.”

The ATO statistics also show that investment in residential property rose 17.2% to $20.5 billion in the 12 months to 31 March 2014.

Although that represents solid growth, Slattery says it has to be put into context.

“Residential property still only represents 3.7% of total SMSF assets of $558.5 billion, and is still dwarfed by non-residential property assets at $68.4 billion or 12.2% of total assets.

“In addition, most of that growth occurred in the first nine months to 31 December 2013, and was starting to ease in the last quarter.

“It’s also interesting to note that limited recourse borrowing arrangements only increased 1.6% in the March quarter and now stand at $2761 million or 0.5% of all SMSF assets. Again SPAA would suggest this number illustrates that trustees and members are adopting a conservative approach to gearing.


Wondering if an SMSF is for you? Read all about it here.

Is a SMSF for you?

Self managed superannuation funds (SMSFs) are the buzz-word of the Australian Financial landscape in 2013. Suddenly, everyone wants one or wants to work out if SMSF’s are applicable to their specific situation. SMSFs hold 31.2% of all superannuation assets and are growing in number at the rate of 7%pa.  Research indicates that 1.4 million people are considering establishing their own SMSF in the next three years.  Are you also one in that million?


Finsec Partners have been specialising in providing high-level strategic professional SMSF services for over 10 years. SMSFs account for over 30% of all superannuation assets in Australia and continue to be the fastest growing sector within the industry.

This growth has been driven by individuals wanting control over their retirement savings. SMSFs provide members with control over the range of investments, the fees being charged, the amount of tax being paid or simply being able to include other family members in the one fund.

A summary of the key benefits include:

Your personal retirement platform – An SMSF is your personal retirement planning platform. It stays with you wherever you go and you will never find yourself in a position where you have to realise investments and pay tax just because you want to change superannuation providers.

Absolute investment flexibility – An SMSF provides you with absolute investment flexibility (subject to the constraints imposed by superannuation law). You can invest in whatever you and your adviser believe will ultimately provide you with the best retirement income result.

Take advantage of tax and superannuation legislation changes – An SMSF provides you with the opportunity to take advantage of changes in tax and superannuation legislation with immediate effect. You and your adviser won’t have to worry about when (or if) your superannuation provider will allow you access to new strategies that become available.

Access to valuable tax concessions – An SMSF provides you with access to valuable tax concessions such as account segregation and imputation credit sharing. This enables you to optimise your superannuation tax position in ways that are generally unavailable through large superannuation funds.

True “family funds” – This allows death benefits to be passed on to future generations in a flexible and tax effective manner.

Cost effective – For larger superannuation account balances an SMSF is generally a cheaper option than a larger commercial superannuation fund because the administration fees are fixed and do not increase as the amount within your superannuation account grows.

Whilst advocates for the obvious advantages of Self Managed Superannuation, they are not without risk and we regularly stress, SMSFs are not for everyone. The amount an individual has in super is by no means the only qualifying factor that should be in play. Thorough suitability scrutiny should always be conducted before making a decision to set up an SMSF.

These risks can be efficiently minimised by ensuring you establishing and maintain an SMSF with the professional advice of an experienced team consisting of an (adviser, accountant and auditor).