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Labor franking policy creates incentive to close SMSFs

Introduction to email trail

The Labor Party misjudged the opposition to its new franking credits policy, forcing it to introduce hastily the 'Pensioner Guarantee', protecting those on a welfare pension from the loss of franking credit refunds. In this announcement, Labor singled out SMSFs as major beneficiaries of the franking refunds:

Labor is cracking down on this tax loophole because it will soon cost the budget $8 billion a year.

Much of this goes to high-wealth individuals, with 80% of the benefit accruing to the wealthiest 20% of retirees. The top 1% of self-managed superannuation funds received an average cash refund of more than $80,000 in 2014-15.

Labor does not think it is fair to spend $8 billion a year on a tax loophole that mainly benefits millionaires who don’t pay income tax.”

As part of its Pensioner Guarantee, Labor provided a grandfathered date for SMSFs, stating:

“Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.”

Many people remain confused by the policy. The Labor proposal stops cash refunds of excess franking credits when taxable income reaches zero, not the use of all franking credits. A range of strategies will unfold which will make the cost savings nowhere near Labor’s estimates, regardless of the merits of the policy proposal.

A clarifying exchange of 10 emails

This exchange between a reader (who we’ll call Trustee X to keep personal details private) and Shadow Treasurer Chris Bowen’s office clarifies Labor’s position. The reader is distressed by the potential loss of a cash refund in his SMSF even after he qualifies for an age pension in future, and he should be considering alternatives.

SMSFs are specifically targeted, but why should the type of investment vehicle used to hold superannuation money be penalised? A recipient of an age pension could move money out of an SMSF into a public super fund or 'member direct' structure and the proposed franking refund policy would have no impact.

1. Email from Trustee X to me

Dear Graham,

Some time ago I contacted you regarding my interpretation of the ALP franking credit cash refund policy. My understanding from some media reports was that I would permanently lose the cash refunds in my SMSF even if at a later stage I became eligible for a pension.

I recently asked Bowen’s office to clarify this issue, and the following is a copy of four emails between myself and Bowen’s office. It appears that I had wrong information.

If in the future, I reduce my assets and become eligible for a pension I will be able to reclaim the cash refunds. Until then, I will lose $10,000–$14,000 income per year.

2. Email from Trustee X to Chris Bowen

Dear Sir

Could you please give me a clear answer to the following question.

I was not in receipt of a Commonwealth Pension on the date that Bill Shorten announced the ALP policy proposal on Franking Credit cash refunds.

The question is: If, in few years’ time, my assets fall to the amount where I can claim a Commonwealth Pension, will I ever be able to reclaim entitlement to my Franking Credits? ie they are lost to me forever?

There is a lot of confusion among SMSF Trustees over this area of the proposed policy.

3. Email from Bowen’s office to Trustee X

Hi Trustee X,

If you are in a position to claim the commonwealth pension, you will, from that point on, be able to claim franking credits. You won’t be able to claim franking credits before that time.

Hope this helps,


Warm Regards,

Thomas McCrudden

Office of Chris Bowen MP

Federal Member for McMahon

4. Email from Trustee X to Bowen's office


Thank you for the very prompt reply, greatly appreciate it.

However can you clarify that I will “be able to claim franking credits” and also retain any cash refunds of these franking credits.

I realised after I sent the original email that my actual question didn’t refer to the cash refunds.

Sorry to be so pedantic but it is an important distinction.

5. Email reply from Bowen’s office

Hi Trustee X,

Yes, you will also be able to given the cash refunds as well after you are on the aged pension.

Warm Regards,

Thomas McCrudden

Office of Chris Bowen MP

Federal Member for McMahon

Trustee X sent me the emails above. He was excited that he would receive franking credit refunds in his SMSF when he started receiving a part age pension. I thought this was incorrect.

6. Email from me to Trustee X

Hi Trustee X

Are you asking as an SMSF trustee about your SMSF? It clearly says in the Labor announcement that the SMSF is only exempt from the changes if a trustee was a welfare pensioner on 28 March 2018.

So I suggest you write back to them and say: "Do you realise that I'm asking this question as a trustee of an SMSF about my SMSF."

7. Email from Trustee X to me


Bugger, I thought I had this nailed and had some future hope. I wrote in the first email, “There is a lot of confusion among SMSF Trustees over this area of the proposed policy.”

The last line was ignored in their reply. Below, in blue, is my final reply from Bowen’s office. You were correct. Basically my wife and I are screwed and will lose $14,000 income.

I started this process because I was reading contradictory advice from experts who were advising asset reduction to obtain a pension as a way of SMSF trustees getting back their cash refunds.

I think that many SMSF trustees are still not fully on top of the proposed policy.

Any how this final advice has renewed my determination to do what I can to prevent Bill from being PM.

8. Email from Bowen’s office to Trustee X

Hi Trustee X,

You are correct. If you are not a pensioner before 28 March 2018 the SMSF is not eligible.

Warm Regards,

Thomas McCrudden

Office of Chris Bowen MP

Federal Member for McMahon

9. Email from me to Trustee X

Hi Trustee X

When your assets fall, perhaps at some point it will no longer be as useful to have an SMSF.

Why not follow one of the options in this article?:

10. Final email from Trustee X to me


My assets haven’t yet fallen, share prices since the GFC have been kind. We still have about $920,000 in the super fund. That’s the problem, if I hadn’t been so frugal over the last 5 years I may have been able to take advantage of the grandfather clause.

I have read about the 'member direct' type of structure, probably in a Cuffelinks article, but unsure about the practical application of it. I will research this further in case Bill gets elected.

Thank you for your interest and support in what I find a very stressful situation.

Trustee X

In conclusion, a person on a part age pension can address the loss of a refund by switching out of an SMSF into a public or 'member direct' structure, or use other solutions such retaining the SMSF and allocating to investments which do not produce franking credits. Here's a reminder what this article said about the 'member direct' alternative:

"The Fund uses its total franking credits to offset the total tax liabilities it pays. It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits."


Looking at Chris Bowen's speeches, this is from the National Press Club on 17 May 2018:

Journalist: "Your negative gearing changes are grandfathered meaning those who enjoy the benefits today enjoy the benefits forever; they're largely baby boomers who enjoyed the growing economy every step of the way from free education all the way through to negative gearing with you. How is that fair?"

Bowen: "It's fair because those people have made investment decisions based on the rules at the time. Big investment decisions and we respect that."

What about the SMSF trustees who set up investments based on the franking rules at the time?


Graham Hand is Managing Editor of Cuffelinks. The information in this article does not consider the circumstances of any other person.


Gerald Vandergert
May 12, 2019

I was on a disability pension until January 2018 and at the age of 65.5 I started an account base pension in February 2018. I am the only member of the SMSF. I expect to have a $7,000 franking going forward, will I lose the franking credits as I don't expect to pay any tax going forward?

I am not eligible for a part old age pension.

May 13, 2019

Gerald, so you chose not to convert your super to an income stream at 60 and access the DSP welfare under the super exemption in accumulation phase until age pension age. And now you complain that you are precluded from any further welfare. Fantastic that the young workers of Australia helped support your DSP welfare so your super could continue to grow in the accumulation phase whilst being exempt at your choice. That is exactly why the majority of the voting public support the winding back of the generous tax and concessions.

August 25, 2018

Trustees legal responsibility and overriding obligation and duty of trust to do the best for every beneficiary (existing and future), as well as not simply avoid causing them harm. (ref. Sir R. Megarry, V-C, in Cowan v Scargill [1985]. s52(2) (b) & (c) of the Super Act.

Shorten has stated Labor will withdraw franking rebates for one group of retired Australian citizens who saved and invested their own money into superannuation. Their investment was mandatory. The rules well known and in place for decades. His focus is pensioners who succeeded to be self-funded in retirement, as they were encouraged by policy and who, no doubt, paid tax all their working lives.

I am pretty sure this makes this the most retrospective (decades), and just plain nasty taxation policy ever seen.

However, this means every superannuation trustee in Australia, is required at law, and indeed has a moral obligation, to NOT vote Labor at the next election as they would be acting against the best interests of the beneficiaries to whom they have obligation.

Industry fund trustees are not exempt as a current member may choose in future to manage their own super, and therefore any vote by a Trustee for Labor would fail the “best interest obligation” and make them a lawbreaker as well as a moral bankrupt.

Everyone with super should request their trustees to guarantee that they will not vote Labour, but can you really trust them?

I suspect every Union representative trustee of an industry fund will knowingly break the law… and they can’t just avoid causing harm, they need to deliberately vote against Labor policy!

August 10, 2018

Thanks Graham....

The real message here is that any policy that puts more people on Pensions - with all associated Govt costs (like the health card) - is bad policy and really needs be highlighted as such. If it shows the policy will increase Govt expenses, I will ensure some friends in the press and LNP get the facts.

Martin H
August 10, 2018

The Gold Coast Bulletin of Wednesday 8th August concerning Labor's changes to the Franking Credit refunds says " . . a retiree on a full age pension with $300,000 in retirement savings will receive a significantly greater income than a retiree with an SMSF who has saved $1m for retirement."

Is this correct? If so, please let me know. It would certainly be worth a full investigation - numbers/tables etc about thresholds etc.

If true, it tells me I should sell all my assets - except about $300,000 - buy an expensive house and get a full pension.

It also saves me a FORTUNE in Medical costs eg the cost of scripts! I would get the Pension Health Card.

It means I would also get all the other Pensioner benefits eg reduced Rates, Rego etc etc.

Basically, if true, we could have Economic Morons running the country. Surely a policy that leads more people to take a pension is "Studip" at best and would end up costing the Government even more?

Graham Hand
August 10, 2018

Hi Martin, Cuffelinks has published many articles on this subject. If you go to our website and type 'franking' in the search box at the top right, you will see all the articles.

We will put together an article for next week bringing all this content to one place.

Cheers, G

August 01, 2018

Hi Steve,

My understanding is that the tax liability of the Trustee level can be offset by the franking credits entitlement that flow from the investment earnings of the Trustee (across all pension and accumulation accounts). The cashflow effects associated with tax are then credited or debited to the relevant members. The job of the Trustee is to allocate the tax costs (tax on contributions & investment earnings) and benefits (franking credits) across the membership base in accordance with their member profile (accumulation or pension) and asset allocations (Aust shares or other). It is not the case that one member stands to benefit at the expense of another member. There is only one taxpayer - the Trustee.

July 30, 2018

Not broken don’t fix. What happened to KISS method Keep It Simple Shorton. Would have ran it past Industry Super so they approve. I try to stay above pension leaving it for diggers, handicapped, single mums etc. Is Bill telling me to buy a new car go on a holiday & put my head in the trough? I hope not. So sad.

July 29, 2018

A very useful contribution you could make is to ask 3 or 4 of the smarter managers to develop a model portfolio which would suit SMSF's in pension phase to get a return of 5-6% and have no franking credits lost.

I envisage there is a mix of ETFs and direct shares that might work well with CSL shares, RMD shares, OS share ETFs, reits, bonds etc.

Many would be grateful of such advice since this Labor policy is looking more likely after the weekend's election results...

Cheers and thanks

July 27, 2018

Let us not forget that the change in franking credit policy by Mr Costello was a hand out to retirees funded by income from the resources boom. Who is more deserving, the people who have a portfolio of shares or pensioners who have nothing? Lets get more nuanced about this debate!

Warren Bird
July 29, 2018

Maybe that was the political motivation at the time. But the effect was to complete the introduction of a proper imputation system that taxed dividend income at the recipient's marginal rate, including those who have a zero rate. And there are plenty of them that no one has a problem with - eg charities.

If there is an issue with some tax payers' marginal rates now, then fix that problem, but leave the imputation system - which is working as it should - alone.

I agree that the debate needs to be more nuanced - I think I've made a nuanced argument since day 1 on this.

John malins
July 27, 2018

What should be emphasised in any conversation about Franking Credits is the anomaly between grandfathering Capital Gains Tax exemptions & not Grandfathering Franking Credit rebates.

July 27, 2018

I naively thought the aim of the superannuation system was to get future generations to self fund retirement. This policy hurts everyone that wishes to self fund retirement in the future not just current retirees. It entrenches Labors driving philosophy that the government knows best.

A simple mitigation step for self investing SMSF trustees is to sell shares cum dividend and buy back after the ex date.

The ultimate solution is also simple, make sure Labor is not restored to power until they irrevocably drop their opportunistic and damaging policy.

July 26, 2018

I'm off to get some popcorn,so glad super never played a big part in my retirement strategies.

July 26, 2018

Be careful what you wish for!

It is not beyond ALP to impose a tax on income on funds in the pension phase and to include capital gains as well, albeit at a concessional rate! Whether it be tax on pension fund income or loss of franking credit refunds SMSFs are in the firing line. I personally don't think it is a matter of getting people into Industry Funds but rather an attempt to tax those on perceived high incomes.

July 27, 2018

Well as a last resort that could be a good thing, then we can claim deductions against earning income in the Super Fund. Right now as Tax Free Pension mode, obviously we can’t.
IF we were in accumulation we could claim deductions.

July 26, 2018

Greetings.Dear Mr Hand. I am concerned and confused about the ALP policy and your explanation on franking credits. Question. If a SMSF has received Imp.Credits for any years, is it those credits which will be taken away if the ALP wins office and their legislation passes both houses.In other words, there is no grandfathering. What can be done to avoid this?

Graham Hand
July 27, 2018

Hi Doug

It is not past imputation credit refunds that will be lost or reclaimed, but future refunds are at risk for certain people.

July 26, 2018

Love your newsletter and perused all the SMSF questions – but puzzled nobody mentions the fact that, by law, in pension mode, we have to take a % of our total out each year – with Shorten plans I am sure many of us use the franking credits (myself $20000) towards our pension when dividends are not producing enough. If we move to growth rather than dividend Stocks then how does the % accrue in time!! Realize Govt. wants us to use up our Super and not leave it to family !! but has been tough with interest rates so low and now this Shorten plan. I feel proud that I don’t need Govt. assistance but sure many will need it in the future. Eventually SMSF may as well be terminated to put into personal Portfolios and at least get Franking credits!! – oh dear forgot the possible change of halving CGT rates! on our profits!! On it goes.

Keep up your good information

Thanks Cuffelinks team

Warren Bird
July 26, 2018

I can only say again, for the umpteenth time, that the better approach would be to increase the tax rate on those that they believe aren't being taxed enough and leave a very good imputation system alone.

Has any politician yet explained why that is so hard?

Jon Kalkman
July 26, 2018

In a zero-tax environment, all franking credits are “excess” and are presently refunded as cash. Since they represent 30% of the total return (pre-paid as company tax) after the shareholder receives 70% of the total as paid dividends (assuming fully franked shares) the loss of this cash refund will have a material effect on the incomes of many self-funded retirees who choose to hold their asset in a SMSF. As Graham points out this policy will have the effect of encouraging some people to close their SMSFs to move their savings to an industry super fund, where they are assured they will continue to receive a cash refund for excess franking credits.

My enquiries with Australian Super and QSuper have been revealing. If I invest in Australian Super’s high growth option, I know I am invested in shares but I have no idea which ones or what my entitlement to franking credits may be. So Australian Super can use my franking credits to pay tax elsewhere or to subsidize other members in the fund. All I have to rely on is the unit price and I have to trust them that it reflects the return I have taken the risk to achieve.

If I hold ANZ shares in my SMSF, the dividend is paid on 2 July 2018. At the end of the financial year around November 2019, my SMSF will receive the cash refund for those franking credits after the fund completes a tax return – some 18 months later. If I hold the same ANZ shares in the Member Direct Option of Australian Super, they assure that the dividend and the refund of the franking credit will be credited to my account on the same day. This tells you straight away that the franking credit refund is not paid from a tax return but from somewhere else. It also tells you that they do this because they know that I know how many ANZ shares I hold and my entitlement to franking credits. It also shows that investing this way would be subject to another layer of policies and procedures beyond my control and subject to arbitrary change.

But there is a catch, (isn’t there always?). All the assets in a super fund are legally owned by the trustee of the fund held on behalf of the beneficial owners, the members. Therefore, the ANZ shares, I think I own in the Member Direct option are not really mine and if ANZ decide to have a special share offer or buyback, only available to shareholders, I do not own the shares. Australian Super, as the legal owners of these shares, may or may not pass on that share option to me at their discretion. It also means that if push comes to shove, they could sell “my” shares against my will and would most certainly do that on my death, in order to finalise my death benefit payment.

Having said that, there may be an advantage to holding my assets in such a fund if/when I lose my marbles so that switching to having my super managed by others, rather than self-managed, would be as simple as filling in a form rather than the whole bother of closing down my SMSF at that time.

July 26, 2018

I used your link to the Collins article which ended with the comment they expected a large industry fund to comment within a week about their proposed use of franking credits. Did that happen and where could we find the comment?

Graham Hand
July 26, 2018

Hi Dave, yes the article written by AustralianSuper is referenced at the end of the article above (before the footnote).

July 26, 2018

It must be comforting to be under the illusion that anything that Chris Bowen now says he will do when in office, he will actually stick to. We went through all this before with ScoMo on CuffeLinks prior to the last Super changes. Politicians can't be trusted - full stop! No quotes from Chris Bowen, of the emails from his office, are worth a damn.

July 26, 2018

Dear Graham, Labor statements about this use the amount to be gained by the ATO on figures based before the government introduced the $1.6 million cap.
They sell it as a slug on the rich - those with large amounts in super.
However since the introduction of the 1.6 million cap the picture has changed
Now the super rich have their $1.6 million in pension tax free but the remainder would be in accumulation and thus subject to tax.
As it is subject to tax they can use that tax to gain the benefit of any franking credits.
Contrast that to the less wealthy living off their $1.6 million, or less, who will receive no tax benefit

Ian Stewart
July 26, 2018

Super in Australia has become an unsafe environment for self directed investment with political and financial penalties increasing for people having the audacity to want to look out for themselves.

Annual political raids on retirement savings can be expected to increase as politicians need more cash to fund giveaways to buy votes.

The main purpose of labor's policy statement is to force funds held in SMSF's into union run super funds, and through them to funnel monies to unions.

If you are happy with this environment then you can save a lot of angst by transferring to one of the industry funds. Here you will probably receive lower returns with large fees being siphoned out to "managers" and union affilates. Non industry funds also have their place at the trough with large fees and poor performance.

Looking after your own interests is not politically correct these days and doing well for yourself is seen as being "unfair". A previous Labor prime minster (Ms JG) said that it was unfair that people were able to accumulate over $1,000,000 in super.

It may be time to accept reality, circumvent the whole issue by closing your SMSF, arranging your affairs to maximise government largesse, and put your funds to use elsewhere in a safer environment.

May 10, 2019


Your account is accurate, the ALP consider financial responsibility by individuals as unfair on those who leave their retirement income to the taxpayer, however ALP politicians consider themselves worthy of all they can get in terms of taxpayer income and benefits. im sure that the real revenue collected by this retrospective law change won't be any higher than 20% of what the ALP claim.

July 26, 2018

I find it quite arrogant for an party to make bold declarations of what is effectively retrospective legislation whilst still in opposition! Bill Shorten is effectively assuming that he will come into power and will be able to pass this proposed legislation through both houses of parliament. Make policy statements all you like - that's helpful for us to know what we're voting for, but I've never seen such arrogance to start mentioning dates that will be over a year before the election is even held...

Paul Kearnan
July 26, 2018

Hi Graham

My wife & I are "partly self funded retirees" who receive a part aged pension. I manage our SMSF from which we draw a pension. We are both in our 70's & so have been Pensioners prior to 28th March, 2018. As our fund is in drawdown phase, it does not pay tax. Are they (the ALP) now saying that we (IE: our SMSF, of which we are the only Members), will still continue to receive a refund of the franking credits if they are elected & subsequently introduce their proposed policy ?

Graham Hand
July 26, 2018

Hi Paul, my understanding is that your SMSF will continue to receive the refunds as you were on a part pension on 28 March 2018.

July 26, 2018

It seems to me that the 'Member Direct' alternative is not guaranteed to lead to the member gaining the benefit of the franking credits anyway - they will simply be dispersed against the tax debts of other members of the fund.

Graham Hand
July 26, 2018

Hi Steve, according to this from AustralianSuper (see reference at end of article), the franking credit does go to the member:

“The Fund uses its total franking credits to offset the total tax liabilities it pays. It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits.”

July 26, 2018

Hi Graham,

My interpretation of the that wording is that you don't necessarily receive the benefit:

"It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity."

This line sounds like the franking credits earned by a pension member will be used to offset the tax liability of an accumulation member.

And this line:

"For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits.”

That contradicts the line about "The Fund uses its total franking credits to offset the total tax liabilities it pays". How does the Fund uses total franking credits to offset total tax if it's directing the franking credits to members in pension mode in the Member Direct Investment Option in the first instance? It can't have it both ways.

I'd like to see the superannuation statement of a member in pension mode in the Member Direct option once the proposed changes become law - will they see individual franking credits being credited to their account? I would be surprised...

Chris O'Neill
September 21, 2018

If the superannuation statement of a member in contribution mode shows a debit for contributions tax then you can be pretty sure that it will continue to show this debit after conditional imputation comes into effect. If they don't pass the value of this contributions tax onto members whose franking credits are being used then they are shamelessly ripping off the members who provide the franking credits.

Peter C
July 26, 2018

From the Hostplus choice plus PDS;

"If you have a Pension account, tax is not paid on earnings,
and the franking credit is paid in full into your transaction

July 26, 2018

Once again this just confirms my own thoughts that this whole ALP policy is mainly an attempt to discourage people from using SMSFs and indirectly supporting the union run ISF (member direct) structure unfairly over an SMSF structure.

There is no financial impact on changing from SMSF to ISF so that is surely an incentive to convert to the ISF structure?

July 26, 2018

There is no detailed legislation yet. There is no legislation at all. There is no Labor government in power yet. So it looks like a lot of time and energy is being spent on a law that doesn’t even exist yet, but might be brought in sometime in the future by a government that doesn’t even exist yet.

July 26, 2018

Perhaps. Or perhaps SMSF trustees who feel they may be affected by a policy that Labor have floated are seeking clarification so that they can decide who to vote for?

This has been one of Cuffelinks most discussed topics. I'm neither retired, nor likely to be in an SMSF, however there are very definite "slippery slope" and "thin end of the wedge" arguments that can be made about franking credits - especially when Labor appeared, early on and perhaps even now, to not understand their own proposal. And also when governments and potential governments are clearly seeking revenue to pay for the latest grand shiny thing.

From the many comments I've read here from people who are SMSF trustees, the amounts they mention appear to be material to their lives - and while also perhaps these people aren't natural Labor voters, I wouldn't rule out their being significant influencers of their peers and families, who well may be.

Chris O'Neill
September 21, 2018

Some of them are (were) Labor voters and elections are decided by relatively small numbers of people.


Leave a Comment:



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