In March 2018, the Australian Labor Party (ALP) announced a policy to remove franking credit refunds. If the ALP wins the next federal election, and the policy passes both Houses of Parliament, the commencement date for these changes will likely be 1 July 2019.
There has been a lot of debate and backlash around what this policy could mean for shareholders and self-managed superannuation funds (SMSFs).
What are franking credits and how do they benefit you?
Under our tax system companies pay 30 per cent tax on their profits. When these profits are then passed on to their shareholders in the form of dividends, the company also gives the shareholders a credit for the tax the company has already paid (the “franking credit”).
The individual shareholder then pays tax on the profit they received from the company less the credit for the tax the company has already paid. The franking credit ensures that the company profits are taxed at a shareholder’s marginal tax rate.
If a taxpayer in the 37 per cent tax bracket owns shares in their own name, they would receive a credit of 30 cents in the dollar for the tax the company has already paid and would then only pay an additional 7 cents in the dollar on the dividend income.
If a taxpayer were in a lower tax bracket than 30 per cent, they would get any excess tax refunded so that they are only paying their marginal rate. Therefore, a shareholder in the 19 per cent tax bracket would receive a credit of 11 cents in the dollar, which would then be refunded
For SMSFs in retirement phase (which generally have a zero tax rate), this means they can receive a full refund of the tax already paid by the company on their behalf.
For SMSFs with members in accumulation phase, franking credits reduce the tax paid on the SMSF’s earnings and they may receive a partial refund of their franking credits depending on the fund’s overall tax liability.
Labor’s proposed franking credit refund policy
The ALP is proposing to remove refunds of excess franking credits. This means that individuals and SMSF’s who currently receive a refund from the ATO (because the amount of franking credits they receive exceeds the tax they are required to pay) will no longer receive the refund. SMSFs and individuals that rely on franking credit refunds for income will need to watch these developments closely and may need to review their investment strategy as a result.
Note that, if the policy is passed into legislation, SMSFs with a member receiving the age pension on or before 28 March 2018 will still be eligible to receive franking credit refunds under the ALP’s “Pensioner Guarantee” plan.
The impact on SMSF earnings rate
SMSF adviser has performed an analysis of this policy change on superannuation balances. Based on the average 65 year-old member’s SMSF balance of $900,000, removing refundable franking credits over 20 years would have the following impact:
|With refundable franking credit||Without refundable franking credit|
|Closing balance after 20 years||$953,480||$825,519|
|Fund income – first year||$36,771||$30,600|
|Annual pension entitlement after 10 years||$60,756||$56,762|
|Annual pension entitlement after 20 years||$88,298||$76,991|
*Note that these calculations assume a 40 per cent allocation to Australian shares, 3 per cent capital growth and a 4 per cent income return. The calculations also assume the SMSF has a single member who only has a retirement phase interest in the fund and is receiving the minimum annual pension entitlement from an account-based pension.
We are encouraging our clients to contact us to review the impact of this policy on your franking credit refunds and SMSF earnings.
If you are not currently a Hall Browns client, we encourage you to contact your adviser for a discussion on the impact of this proposed legislation. If you do not currently have access to an adviser with expertise in this area, our specialist tax and SMSF advisers are able to assist. Feel free to contact us for a chat about your needs and concerns on 07 3831 1055 or [email protected].
DISCLAIMER: The information on this website and the links provided are for general information only and should not be taken as constituting professional advice from Hall Browns Accountants. You should consider seeking the appropriate legal, financial, or taxation advice to check how the website information relates to your unique circumstances.