Natalie Raju and Damian Ryan look at the possible impacts on SMSFs and other superannuation funds from the ALP's proposed withdrawal of refundability of franking credits.
Australia currently has a policy setting which exempts from tax superannuation fund earnings in the pension phase, whilst also allowing for the refundability of franking credits. Given the ageing population and larger proportion of superannuation members moving into pension phase, that policy setting is arguably becoming fiscally unsustainable in the long term.
One policy setting to place a cap on this growing tax expenditure, is to limit the amount of funds in pension phase. The Government achieved this by the $1.6 million transfer balance cap measures that were introduced from 1 July 2017.
A second policy setting that would also place a cap on this tax expenditure, is the one being proposed by Labor. This would limit the utilisation of franking credits to the fund's overall tax liability, but to deny the cash refund of any excess.
Under Labor’s proposals, for large Australian Prudential Regulation Authority (APRA) regulated superannuation funds with a significant proportion of members still in accumulation phase, the franking credit would still be able to be utilised against the tax payable on other assessable investment earnings - as well as tax on contributions. For these funds, there will be no change.
A small (but growing) minority of APRA-regulated funds that have members predominantly in pension phase will be affected. Those significantly impacted will be Self Managed Super Funds (SMSFs) with members in pension phase. To provide context to the issue, approximately, one-third of funds in superannuation are invested in SMSFs. These funds, often in pension phase, will now be denied a cash refund to the fund of the excess franking credits.
This may create a distortion in the market whereby a pension member in a SMSF is treated differently from a pension member in an APRA-regulated fund.
It will also be interesting to observe the asset allocation strategies of SMSFs, and/or APRA-regulated funds as a result of this proposal if it were to be implemented. Australian equities as an asset class are highly valued, in part, because of the value of the franking credits. One may see a rebalancing of portfolios away from Australian equities into other classes of assets.