Self Managed Superfunds at risk if Labor wins power
This week Bill Shorten announced a crackdown on what Labor considers a “tax loophole” with self managed superfunds, and self funded retirees wearing the biggest impact.
The measure is toted to earn the Government at least $5 billion a year in additional tax revenue, which targets the franking credit system, and would come into effect from July 2019.
Franking credits apply when shareholders receive a dividend and a credit based on the tax already paid by the company on their profits. This credit can be used to offset any taxable income, or as a cash tax refund, for those who have low or no taxable income.
The system was set up so that people weren’t taxed twice. It’s evolved into a system where some people get taxed zero times. Cash refunds on franking credits were introduced back in 2001 to incentivise those with no or low incomes to invest in Australian companies. Back then it cost the budget $550 million a year because very few low income earners also owned shares.
Changes to superannuation rules in 2006 meant retirees didn’t pay tax on their super withdrawals or their super earnings which meant a significant increase in the number of individuals qualifying for cash refunds on unused franking credits.
According to some economists, these incentives encourage people to invest in Australian companies, and ending them could see superfunds withdraw their investments from local firms. The scheme has also largely encouraged Australian Companies to pay dividends rather than hoard earnings or invest in low-return projects.
It is reported the wealthiest 20% of retirees own 86% of shares held by older Australians outside of Super, and nearly half of these refunds are going to people with super balances over $2.4 million. The split is said to be 33% paid by individuals, 60% self managed superfunds, and 7% by industry superfunds.
Labor proposes to abolish cash refunds of unused franking credits for individuals and superfunds.
Doing away with the scheme would not only impact the investments in Australian Companies, but it effectively gives a 30% tax increase on super and self managed funds who do invest in Australian companies. Data shows that Australian Shares are one of the largest asset classes held by self managed superfunds (between 21 and 30% of the entire portfolio). The refund makes certain types of investment attractive and also drives how much is invested.
Bill Shorten is now reported to be offering cash payments to some low income pensioners as a sweetener, but no firm policy data has been released at this time.
If you’d like further information on how this may impact your SMSF, please reach out to PJT’s Director Wayne Patten on 07 5413 9300.