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On franking, all public funds are not the same

Many SMSF trustees who may lose their franking credit refunds under Labor’s proposed policy are considering transferring to a large industry or retail fund. It has become a common assumption that such a fund will give retirees access to franking credit refunds. For example, Robert Gottliebsen writing in The Australian last weekend said:

“But the ALP plan is that if you save via an industry super fund or a large retail fund, then you can receive your cash franking in full.”

This is not correct. Some large super funds are receiving a refund that they will lose under the Labor policy. When it comes to franking credits, all public funds are not all created equally.

Why are we assuming all large funds can use the full franking credit?

Under the imputation system, the franking credits attached to a dividend can be used to offset tax payable by the recipient. For an individual, excess imputation credits can offset tax liabilities on other taxable income, including salary.

Large pooled funds with members in the accumulation phase incur a tax liability on both their assessable contributions and asset earnings. Where this tax liability is sufficient to utilise the franking credits generated by all members (including those in pension mode who pay no tax), the franking credits are fully utilised and there is no refund. Usually, the fund makes internal transfers between investment options to ensure the franking benefits go to the entitled members.

Some large funds are not in this position

There are some existing funds with a large proportion of pension phase members that already receive a refund of excess franking credits. In the future, more funds will reach this position as the population ages and more people retire. Such a fund would have less assessable contributions, especially when combined with low or negative investment returns, and the net cash refund will be lost under Labor.

In the accounts of the super fund, where once a dollar value of a tax benefit would have been added to the unit price, the loss of the franking credit will reduce the unit price and the investment return.

How does someone who is contemplating transferring to a pooled fund due to the Labor proposal know which funds are likely to be affected? The main indicator will be the proportion of accumulation phase members (and how much money they contribute and hold in the fund) relative to the retirement phase.

As examples of each:

Unlikely to lose franking credits

A fund which attracts new, younger members as a natural part of its business (and purely as a guess, examples might include REST, which services retail employees, or Hostplus, which targets the hospitality and tourism industries) should have a steady stream of accumulators. Traditionally, their older, top-end members drift into SMSFs, although this trend has reduced recently.

More likely to lose franking credits

According to Craig Day, Colonial First State’s Executive Manager Technical Services, some superannuation wraps are similar to industry funds with significant numbers of members in the accumulation phase. However, he advised in a technical note that others may be vulnerable:

“It is important to note superannuation wraps may be more exposed to the ALP proposals compared to large pooled funds as they tend to have larger proportions of older retired members with larger balances in the retirement phase compared to pooled funds.”

Check the fund before you switch 

All public superannuation funds should make a statement on their expected treatment of franking credits under Labor. For example, this week, Colonial First State advised on behalf of its super funds under their FirstChoice and FirstWrap banner:

"Impact on FirstChoice

Based on our current assessment of the Fund’s historical tax positions, we expect FirstChoice to have enough assessable income from investment earnings and concessional contributions to fully absorb and utilise all the imputation credits that it may derive each year.

With significant numbers of members in the accumulation phase relative to members in the retirement phase, large pooled funds, such as FirstChoice, are likely to be impacted to a lesser extent by the ALP proposal as these funds will generally have sufficient levels of taxable income, including assessable contributions, to fully utilise any excess imputation credits.

Impact on FirstWrap

Based on our current assessment of the Fund’s historical tax positions, we expect FirstWrap to be in a net refund position (with excess imputation credits). Being in a net refund position means CFS as trustee would need to equitably distribute the loss of excess imputation credits across all members of the fund.

Across the industry, superannuation wrap products, such as FirstWrap, are more likely to be impacted by the ALP proposals given they tend to have:

*  larger proportions of older members with larger balances in the retirement phase compared to large pooled funds

*  many members that don’t contribute their super guarantee or make any other concessional contributions into the wrap (as their default fund)."

In summary, any SMSF trustee who plans to close their SMSF and go into a pooled fund needs to be sure the new fund can utilise its franking credits.


Addendum. Note from a very angry reader, Jane Abbott (identified with permission).

Good afternoon Graham,

Yesterday I along with approximately 100 other self funded retiree individuals proudly went to the Parliamentary Inquiry that finally occurred in Perth. I would like to make some comments on the vibe and feeling of this meeting.

Present were Josh Wilson and Matt Keogh, ALP parliamentarians from WA, and of course Tim Wilson and Craig Kelly for the Liberals. Plus a secretary.

We were all given 3.5 minutes to give our side and impacts of ALP’s proposal to remove franking credits. There were some sad stories, for individuals and couples. I’m sure this Committee has heard the same stores hundreds of times all around Australia. We were average retirees, not the top end of town rich older folk here. They have no reason to attend.

The reasons given to invest in Australian companies that pay fully franked dividends are widely known: good returns, fully franked, Aussie companies, familiarity and knowledge of their businesses. Most had held shares for a very long time, e.g, TLS, CBA, BHP, WOW, WES. We all proudly like to support our country’s businesses.

But it was very concerning to see these two Labor parliamentarians sit there and listen to everybody’s story, then to turn around when asked a question and respond by saying these meetings were being turned in a political campaign by the Liberal Party.

If these meetings are NOT a sign of democracy, I am flabbergasted to know what is? Aren’t we older, retired, self-funded Australians entitled to have a voice and lay out the bare facts to nominated representatives of the present Government and future Government (heaven help us) as to the impact of losing a percentage of our income.

If employees can go out on strike to demand an increases in wages, with unions backing them, why can’t us older people say what and how the future will be if the ALP get this policy through. They say “they won’t be turning” when in Government.

Their policy presents the biggest discrimination case this century, which determines which self-funded pensioners will receive the franking credits, depending on where they hold their retirement money, such as SMSF, as a individual or in an industry super fund. Or receive a Government Age Pension, CPI-indexed for life.

I am very cranky.

Signed Jane Abbott, who later added, “I am still seething”.


Graham Hand is Managing Editor of Cuffelinks. This article is for general information only and does not consider the circumstances of any investor.


May 16, 2019

The current system is a rort that needs to be curtailed. I'm going to lose money but don't care because inequality is destroying our society. The party is over, and the outrage and whingeing is by mostly wealthy retirees and baby boomers.

Ian Andrews
March 03, 2019

Hi Graham
The final question in the survey had a space for comments – what follows is a clarification of what I wrote. Please feel free to criticise any misconceptions or potential problems.
If W represents the gross income from an individual’s work (salary, wages, fees, takings etc), S the received income from shares, T the income tax collected by PAYE and C the imputation credits on the shares, then I understand what follows represents both the current and future situation under the Labor proposals.
Gross income is W + S + C.
If the assessed income tax exceeds T + C the ATO charges the difference to the individual, while in the (unlikely) case that the amounts are equal, no further action is required.
The current situation is that if T + C exceeds the assessment, the ATO refunds the balance to the individual whereas the Labor proposal envisages refunding as much as all or as little as none of the excess on arbitrary and hence divisive grounds.
My (off the cuff) suggestion was based on the generally accepted principle that it is desirable to assist the poorer echelons of society and reasonable to progressively tax the richer ones. Hence in the latter case where T + C exceeds the assessment, the action taken by the ATO in ALL cases would be to refund 100% of the first $1000 of the balance, 99% of the next $1000, 98% of the next, and so on. Thus for example, both a pensioner and a self-funded retiree who did not pay income tax, with a moderate C of say $6000 would each receive $5850. A ‘super rich’ retiree (the supposed target of the proposal), even with a balance of several hundred thousand dollars would be limited to a refund of no more than $50,500. The essence of my suggestion is the principle – the scale or rate of reduction is open to modification.

March 02, 2019

It is clear that many funds will no longer have full tax coverage over their franking credits once the deluge of SMSF funds in retirement phase come in.
It should be made clear to the population that Labor's changes will actually affect all of them, since if they possess any Australian shares, a percentage of those franking credits will no longer be fully utilised. Hence the claim that these changes are only going to affect a privileged few is false, every super account holder with franking credits will see their incomes fall.

March 02, 2019

Good letter in the West Australian on Monday.I' ve rounded the numbers.

A) Goes to work and pays $3000 tax on an income of $37000.

B) Self funded retiree earns $37000 gross in dividends,and pays $11000 in tax.

I've added this bit and I am not up to speed with the pension as thankfully asset and income tests deny me anything.

C) Pensioner,single pension,bit of part time work,earns $37000. Tax free with SAPTO?


March 02, 2019

"C) Pensioner,single pension,bit of part time work,earns $37000. Tax free with SAPTO?":

D) Single Age Pensioner, bit of dividend income, earns $37,000:

Gross dividend: 13,176.20
Company tax: -3,952.86
Cash dividend: 9,223.34

Single Age Pension: 23,823.80
Gross Taxable Income: 37,000.00

Tax on taxable income: -3,572.00
Tax offset: Seniors & Pensioners (SAPTO); 598.75
Tax offset: Low income (LITO); 445.00
Tax offset: Low middle (LAMITO): 200.00
Medicare Levy: -326.20
Tax on taxable income net: -2,654.45
Tax credit on dividend income: 3,952.86
Tax total: 1,298.41
Cash after tax: 34,345.55

March 02, 2019

So a loose assumption is that the Self funded retiree has approx $700,000 in shares. The pensioner based on your stated income outcome of $37000 which includes a full age pension and access to the working bonus $6500 to offset the bit of part time work would most likely mean they have minimal deemed financial assets. Would be an interesting poll to see which position a retiree would rather be in, considering the proposed changes to franking credits.

Jon Kalkman
March 01, 2019

The only way you can be reasonably sure to retain your franking credits in an industry fund, is if you invest in their "member direct" option. Because you control a parcel of shares, you know your entitlement to these credits. Interestingly these franking credits are paid the same day as the dividend so they are clearly not dependent on the fund's tax return.

You will not "own" the shares as they belong to the trustee but you know (and they know that you know) what your entitlement is. At least that is the policy at present, but it could easily change.

If you invest in one of their managed growth options, you will have no idea which shares you "own" and what your franking credits are. We are reassured that these credits are fairly distributed between investment options and between accumulators and pension phase, but there is absolutely no transparency. All you have to go on is the price movements in the units you own. And we just have to take their word for those prices, especially if their underlying assets are unlisted.

The trustees own the shares and the franking credits and they could be using them for any purpose they choose. These credits could be used to pay an additional management fee to the trustee and we would never know. There is no accountability to members, they are not shareholders. Industry funds are a law unto themselves.

What a pity the Royal Commission was more interested in bashing the banks than investigating the "black box' that is industry super funds.

March 02, 2019

You can't be sure by going the way you have claimed. The current policy is based on the current reality of excess taxes versus franking credits in their funds. Should that radically change (like the influx of a large pool of funds from people in pension phase with excess franking credits) then the fund will have no recourse but to change their method of handling members with excess franking credits, they can't, obviously, run at a massive loss.

March 02, 2019

Jon, you talk about "industry funds being a law unto themselves" and that “there is absolutely no transparency” on how franking credits are distributed - this is an unfair and (I suspect) ill-informed criticism.

The law is the same for all super funds (excl SMSFs), so please be specific in regard to which "law" you are referring to. Simply stating a throw-away line like that should not be made without supporting examples.

You suggest that franking credits could be used to pay additional fees to an industry fund trustee - if that is your concern, check out their financial statements as any such payment would have to be disclosed there as trustee income.

When it comes to the allocation of franking credits, what sort of transparency are you after, do you want disclosure of every dividend transaction received and how the attached franking credit was allocated – show me a fund that does that and I will shut up.

The fact is that unit prices are calculated by the fund’s custodian and the custodian’s systems will allocate franking credits to the assets that earned them, which will in turn be reflected in unit prices (or crediting rates for some industry funds). I simply don’t know what level of transparency you are wanting to see other than a statement to the above effect, which many funds (retail and industry) already provide. For example, the country’s largest fund, AustralianSuper, states the following: “Franking credits are applied to increase pension member assets”. This is on their website in their (appropriately named) “tax transparency report”. What else do you require from them?

Please be specific about what retail funds disclose compared to industry funds, rather than throw-away lines.

There is no doubt that many industry funds used to be not great on some disclosure, but that was many years ago as they were growing and quite frankly I suspect that some of the very large funds are now the best in the overall industry when it comes to disclosure, just go to their websites and see for yourself.

March 02, 2019

The transparency required would be:
1) How much excess taxes were paid by the fund in the last financial year. This would provide guidance as to how much pension phase SMSF franking credits they can viably absorb without starting to lose them. SMSF funds wanting to flee to retail funds need to know this - and frankly this needs to be updated often as the funds start rolling in.
2) What their policy will be when franking credits outweigh taxes owing. Will it be proportional - i.e. all fund holders with franking credit accruing assets will lose some of those credits? Will it attempt to be netted out on an individual account basis first - i.e. if my unit's taxes exceed my franking credits, will I get all my franking credits consumed first?

The policy opens up many cans of worms. Labor has not revealed much detail as to how it would actually operate. I doubt they have any clue themselves based on their hasty need to patch in the pensioner guarantee just 2 weeks after announcing their policy. It still leaves the ridiculous anomoly of a person receiving a small part-pension receiving all their 30% franking credits back, but a person earning just a little too much for a part-pension losing all of theirs. With no taper between these two positions, the latter pensioner could end up worse off overall for having little more than the former.

Jon Kalkman
March 05, 2019

What the industry funds are really saying is that, because of their tax liability, they will keep their franking credits after Labor’s proposal comes into effect. Unlike SMSFs, their fund income will not be affected, their unit prices will not be affected, and life will continue as before. Whatever way they arrive at their unit prices now, or however they currently distribute their franking credits between different member accounts or among various investment options, will not change. Members will not notice anything different because for them nothing will change.

I say again, the only way you can be reasonably sure to retain your franking credits in an industry fund, is if you invest in their “member direct” option. Because you control a parcel of shares, you know your entitlement to these franking credits and those franking credits are credited to your account on the same day as the dividend. You do not own the shares, the trustee does, and there is no guarantee that you are entitled to any of the rights associated with those shares, such as a buy-back. There are also frequently several restrictions on that investment option that need to be carefully considered.

If people think that, by moving from an SMSF to an Industry funds all of a sudden, these new members will be entitled to a cash refund of their franking credits, I think they are mistaken. If a SMSF member transfers their money into one or more of the industry fund’s managed investment options, as they are encouraged to do because the managed options generate the fees for the fund, they will be treated the same as their existing members in those managed options who benefit from the fund’s franking credits under existing fund policy. And note that it policy not legislation that determines this.

It begs the question: if the industry fund’s existing policy regarding investment strategy and franking credits will be attractive to SMSF members after Labor’s proposed change, because they are unchanged from what exists now, why are people still in an SMSF at present when an industry fund is so attractive?

March 06, 2019

Jon, I don't think a member direct investment guarantees you will be refunded all your franking credits. Right now industry funds have excess taxes, so all franking credits are covered and paid to the original "owner". If SMSFs move their holdings to industry funds in members direct style accounts with large franking credit pools the taxes owed on the other assets in the industry funds will be exhausted and the excess franking credits will be lost.

Janet Lawson
March 01, 2019

Jan H

I attended the Adelaide Committee hearing and we had over 200 attending. Josh Wilson was the only ALP member to attend along with Craig Kelly and Tim Wilson plus the Parliamentary Secretary. To his credit Josh Wilson did not give the same line as in WA but as the people gave their 3 min speeches with 99.9% against the policy the look on his face was one of "get me out of here". We had quite a few Labor voters openly saying that they will follow Chris Bowen's message and vote for someone else. We have all retired with plans made over 20 years ago and like myself with BHP shares and investing in Australia. All Super funds should operate under the same rules, Industry and Retail
Funds plus Unions, this policy is divisive and panders to Shortens rich v poor mantra.

March 03, 2019

Whilst some valid points Jan, with no material change in the polls from the campaign launched by the various Murdoch funded publications and lobby groups, one can only conclude that dinner partiy diners are discussing their fall in house prices and relative decline in their living standards. Franking credit discussions just don’t have the same cachet whilst tucking into the nightly dinner. Keep fighting the good fight though.

Christopher O'Neill
March 10, 2019

Yes I'm sure franking credit discussions just don’t have the same cachet if you don't get refunds but that's pretty obvious.

One of the important things about polls though is that Labor/Greens are extremely unlikely to get control of the Senate and the independents are opposed to Labor's policy too so this policy will likely end up like Joe Hockey's 2014 budget.

Shaun Sheridan
March 01, 2019

One problem is that Bill Shorten and many other MP's receive fully indexed pensions for life and never ever face the consequences of this or any other decisions they make on retirement savings and pensions if they did their silence would be deafening.

Peter Simpson
February 28, 2019

These comments and many others I have read highlight the emotions arising when a loss is experienced. I am one who will be impacted by this but recognise that the current policy is unsustainable.

Good financial advice would see the impact minimised through diversification. What returns have been missed by over focusing on tax refunds?

I agree that the proposed changes along with others such as the $1.6m cap, reduced concessional and non concessional contributions have all impacted retirement planning. Constant change reduces confidence in long term planning and people providing for their retirement.

I would not seek to diminish the pain experienced by those affected but there is also a hysteria that seems to overstate the impact. More facts and considered planning options need to be reported and most large funds will have no problems as they have large accumulation FUM.

When I donate to charity I cannot claim a deduction against NIL tax and get a refund.

February 28, 2019

"current policy is unsustainable":

A new tax to perhaps increase revenue 1% will have negligible effect. Sustainability is not the problem being solved by this new tax,

The flawless dividend imputation system is not at fault. Another non-problem.

What is the actual problem that requires damaging an imputation system as the solution?

Warren Bird
February 28, 2019

The current policy is perfectly sustainable. The franking credits refunded to those on a zero tax rate are paid for by the additional tax paid on their dividends by those that are on the higher marginal tax rate.

The purpose of the imputation scheme is to raise tax on company earnings at the average tax rate of all the shareholders, with each shareholder paying at their rate. That is achieved! The scheme does not “cost money” to the budget because of the way it works - it delivers the right outcome.

As I’ve said until I’m blue in the face, if there is a problem it’s that some people on the zero tax rate possibly shouldn’t be. It’s not a problem with the imputation system! I also don’t think the other matter is a problem - the $1.6 mn cap in pension mode dealt with that. But that’s where the debate should be and away with this myth that franking credit refunds can be considered in total isolation as a “cost item”.

March 01, 2019

" if there is a problem it’s that some people on the zero tax rate possibly shouldn’t be. It’s not a problem with the imputation system! "

I think this is the problem- the changes introduced in the Howard Costello years in the mining boom have proven to be short sighted and over generous.

Any changes should be equitable though and Chris Bowen's Self Funded Retiree Tax is not!

March 01, 2019

Warren, I think it is reasonably clear that sustainability refers to total government expenditure versus revenue.

Warren Bird
March 01, 2019

Firstly Think, that may be how the budget should be thought of but many commenting on this issue isolate this one aspect of this one part of the tax dystem and say that "it" is not sustainable. That's what I'm discussing challenging people to back up what is just one of the many flippant, roll off the tongue statements against a policy that actually stacks up on principle and empirically when you put in a bit of intellectual effort.

Second, our budget position is not "unsustainable". We need to keep the balance sound, but franking credits are not threatening to undo the fabric of our fiscal situation. That is just wrong.

March 04, 2019

Appreciate Warren Bird's comment. Given our vertical equity ethos, there is an argument that Australia's imputation system is the best way to cope with our zero tax marginal rate bands for low-income holders of a few shares as well as our zero tax pension mode income for assets under $1.6m.

Jan H
March 01, 2019

Peter S; "When I donate to charity I cannot claim a deduction against NIL tax and get a refund."

1. But you can use the deduction to reduce your taxable income (even to zero)2
2. The FC is NOT a deductible expense. It is INCOME withheld.

Warren: I agree. The problem lies not with the imputation system but more with the fact that most people, including those who should, don't understand it.

Re: budget sustainability: How does the amount of cash refunds paid to those on zero tax rate compare to the $18200 tax-free threshold (handout) paid to wage-earners? As I have commented (many times), when Keating introduced the imputation system the TFT was $5400. Cash refunds were NOT introduced during the mining boom but as part of a larger GST compensation package in 2000/2001. The TFT was raised to $6000. Then Labor raised it in 2012/13 to $18200. Yet, no one ever comments on this largesse and whether it is sustainable. My suggestion is that if cash refunds are stopped, then to preserve the taxation status quo, the TFT should return to $5400. But that would be political suicide, wouldn't it?
Oh, and I wish people would do their research before making wild incorrect claims.

Paul Panozzo
March 01, 2019

1. Paying out on pre 2005 Defined Benefits Super schemes IS UNSUSTAINABLE - why not retrospectively end this gravy boat?

2. More people on the age pension and spending less in the economy (lower company tax receipts etc) will be unsustainable

2. Less incentive to work hard, invest will also be ... unsustainable!!!

Robert Goodwin
February 28, 2019

(Cranky) Jane Abbott. Dear Jane, we hear you.Chris Bowen has told us what we need to do. We need to ensure everyone understands the impact of this discrimination on a small section of Superannuation members. Make sure everyone you know votes as he directed .....against Labor. Ensure there are enough independents in the Senate to block any legislation. Labor is very confident it can win this election and win easily. It’s up to us to show them they’re wrong.

Robert Goodwin
February 28, 2019

I see there another wishynwashy response from Bowen regarding the cost of the refund of franking credits. He quotes spiralling costs BUT always figures before the $1.6m cap was put in place. His proposed franking policy change will NOT reduce any franking refunds to industry/corporate members in pension stage(who surely must make up the greatest majority of pension members in super in Australia?
So you can argue he’s targeting the small end of super so any savings will reflect that. What can’t he see? Derrr

Robert Goodwin
February 28, 2019

Finally someone with some clout has also raised the matter of the net taxing in the large industry funds (John Abernnethy Clime Capital Limited) and called it for what it is “tax minimisation”. Just proves what a mob of dunces we have in Canberra and the ATO? How is it legal to offset tax payable by one member against tax credits of another member just because they are in same fund. Thankyou

February 28, 2019

Tax returns are done at the super fund level, not at the member level.

March 02, 2019

Then let SMSFs pool their earnings too, by allowing larger sets of members and the ability to transfer excess franking credits inside the super funds to member's personal tax debts.

If the Labor party were truly serious about franking credits being unsustainable they would have just changed their deductibility to 95% of face value. That would have treated everyone equally, and the affect on retirees dependent on these incomes and with no ability to change their circumstances significantly would amount to a maximum 1.5% reduction in their overall income rather than 30%.

Ken Scott
February 28, 2019

The Labor Party should put forward a proposal which has some basis in equity. The current one is so unfair in so many different circumstances.

I attended the Parliamentary Enquiry hearing in Adelaide, and the number of different outcomes for people in the same financial bracket was really hard to keep up with.

For my wife & myself, Labor wants us to pay 30% more tax than if we were young wage earners on the same income.

At the same time we do not qualify for any government benefits, nor will we under Labor's proposal.

February 28, 2019

I sent an email to Chris Bowen and got an answer. I tried to identify reasons why I was not a company, that franking credits were both income and tax, since I paid no tax that Labor could not take my income, etc. I was told by Mr McCrudden in Bowen's office that all my questions were dealt with in the email sent. I particularly liked the nobody will pay more tax statement - again franking credits are tax and income, draw your own conclusions.
Dear Alan

Thank you for your email regarding Labor’s plan to reform dividend imputation.

Australia is the only country in the world with fully refundable imputation system. Under Labor’s policy dividend imputation will remain, but cash payments will no longer be made to people who have managed to reduce their tax rate to zero or have paid no income tax. Tax on company profits will continue to be paid only once under Labor’s plans. This is in keeping with the intent of the original dividend imputation system and with Labor’s principles of a fairness and simplicity in tax policy.

Labor’s reforms to excess dividend imputation credits will remove a fiscally unsustainable tax arrangement that is seeing billions of dollars in lost revenue, making it harder for the government to fund important services and return to surplus. Dividend imputation worked perfectly well between 1987 and 2000 when cash refunds weren’t sent to people who didn’t pay income tax. Labor will return to that system. When cash refunds were introduced, it was estimated to cost the budget around $500 million a year. The annual cost has now blown out to $6 billion. An ageing population is set to put even further pressure on the budget in the coming years making it harder for future Government to fund important health care services, which is why this is a growing cost the budget can no longer afford.

It is important to remember that our policy means that no one loses a cent of their share dividends, and no one pays more tax. The very generous tax concessions provided to superannuation which allows many retirees to draw an income which is tax-free will continue to apply.

Labor is focused on creating a tax system that works for all Australians and that the burden of budget repair is evenly shared across the community. We also need to ensure that the budget can help support the delivery of world class health and education systems into the future. Whatever your income or wealth in Australia, I want to make sure that if people need to see a doctor or they want to give their children a good quality education, that they can afford it. This is why difficult decisions on the budget are necessary.

Unlike the Abbott-Turnbull Government, Labor is prepared to be honest about its plans well in advance of an election. While I understand not everyone, including yourself will agree with this policy, it is necessary. If this issue is not addressed it ultimately means that working Australians will have to shoulder a larger burden of budget repair. By being upfront with our plans, people like yourself will have time to seek advice and if desired, re-structure their financial affairs to reduce the impact of the policy.

I would also note that a recent Treasury FOI indicated that more than two-thirds of cash refunds to SMSFs are to those whose fund balance per member is greater than $1 million. I also refer to analysis from the PBO that shows the vast majority of individual taxpayers in Australia – 92 per cent in 2014-15 – do not receive cash refunds for excess imputation credits.

Yours sincerely,

Chris Bowen MP

February 28, 2019

"Australia is the only country in the world with fully refundable imputation system.":

Other countries have systems which attempt to produce a similar result - same rate of tax on all income for same taxpayer with minimal compliance cost.

They fail.

Jan H
February 28, 2019

Dudley, Trying to compare tax regimes from different countries is not simple. For example, under New Zealand tax law, New Zealand shares, and some Australian shares, aren't subject to capital gains tax. In other countries, mortgage expenditure on the principle residence is fully or partly tax-deductible. So, it is overly simplistic and quite dishonest to argue that cash refunds should be abolished because Australia is the only country allowing them.

March 01, 2019

"it is overly simplistic and quite dishonest to argue that cash refunds should be abolished because Australia is the only country allowing them":

Especially when Australia has the best system for taxing dividends at the same rate as all other income for the same taxpayer.

To divert from such perfection is to favour one type of income over another - Labor's proposal outcome.

Jan H
March 04, 2019

Alan: Thank you for posting CB's reply. to justify the repeal of cash refunds, CB says: "Australia is the only country in the world with fully refundable imputation system".

Well, Australia has been the only country to do many things. eg. seatbelts, bike helmets. Just because we are the "only", is not a rational argument for abandoning something. Let's be a leader, not a follower.

And, this does not account for the many ways countries tax their subjects. This is false logic.

March 05, 2019

Jan, The polls are diametrically opposed to your rationale. I guess they just don’t buy into the argument that seatbelts and bike helmets have any relationship to the franking credit debate. I keep waiting for some traction on this issue but so far only the vested interest groups have used their voice. Unless the wider voting cohort is engaged, it may end up a lost cause.

March 05, 2019

Perhaps someone should inform the wider populace that when SMSFs flood the retail funds with their franked investments, the funds will run out of tax obligations and need to reduce the amount of the franking credits that will be able to be credited to all accounts. That would mean lower super growth across most superannuation investments, not just retirees.

Greg Einfeld
February 28, 2019

Today the vast majority of super balances are in accumulation. However this won't always be the case. More and more public offer funds will move into this position as the industry matures. In the future this policy will affect all members at some stage, regardless of what type of fund they are in.

February 28, 2019

Excellent point Greg.

Bob Jarvi8e
February 28, 2019

It appears to me that pension members in large funds are getting less returns now than they would if pension members were segregated assuming that the investments were the same. The franking credit refund to which they would currently be entitled is being used to pay tax for accumulation members increasing their return. Pension members returns should remain the same under Labour policy.

Graham Hand
February 28, 2019

Hi Bob, this is how the CFS paper explains it:

To ensure all members are treated fairly, trustees are required to calculate tax at the member and investment option levels as well as at the fund level to ensure that the members in each investment option pay the appropriate amount of tax and receive the appropriate amount of refund for any excess imputation credits.

For example, if a fund had a tax liability in one investment option (Option A) of $100, and excess imputation credits of $100 in another investment option (Option B), the fund as a whole would be in nil tax position. However, to ensure the members in Option A do not inappropriately benefit from the trustee using the excess imputation credits in Option B to reduce the fund’s overall tax liability to nil, the trustee would deduct the $100 tax from Option A and then use those tax provisions to settle an internal $100 refund on Option B.

March 01, 2019

Yes, but not all funds treat it this way, only CFS has declared their approach. I think there is significant different depending on use of pooled statutory funds or segregated pools. It will be a nightmare trying to isolate which is which for advisers. But probably start with the 10 biggest funds and work down to see the approach.

February 28, 2019

Just remember the tax return is done at a fund level and as per the article 'all public funds are not the same' and research will be required on what they each do.

Cuffelinks have touched in this in How do ‘direct investment options’ deal with franking credits?

Ryan P
February 28, 2019

Graham - excellent article adding another angle to the ongoing discussion. Another aspect that I have not seen discussed anywhere is: how would the proposed policy affect a not-for-profit organisation? One would assume as no taxes are paid by the entity they would not be able to claim the credits, but I've seen nothing on the topic.

Steve Martin
March 05, 2019

Not for profits and charities were exempted from the policy at the outset. Remember that unions are not for profits. They will continue to be entitled to refunds of franking credits.

Phillip Stewart
February 28, 2019

On a practical note I worked out the effective tax rate on my 2018 SMSF tax return on the basis that the refund of excess franking credits was denied. The answer was 39.3%. This approximates the same marginal rate payable on incomes over $90,000.

Three observations. 1 - Under normal circumstances the maximum marginal rate of tax paid by an SMSF is 15%. 2 - I will take action as necessary to avoid this impost. 3 - I don't think I will be Robinson Crusoe.

Bill Watson
February 28, 2019

David, from comments I see from people supporting labor's policy I can only conclude that they do not understand the system. This is confirmed by ignorant statements like "they have not paid tax so should not be refunded the excess franking credits". In fact the shareholders are simply being refunded tax that they have overpaid when in a zero tax bracket. It is logical but some people seem to have trouble understanding it.

February 28, 2019

Hi Bill,

No doubt some don't understand the system but others do. Picking apart statements like you have quoted I think misses the point that no tax has been effectively paid when it is refunded in full (I get it they are in a zero tax bracket and don't have to).

The Labor proposal taps into the view that such a bracket shouldn't exist, in a way they likely see as more politically palatable than removing it.

February 28, 2019

"politically palatable":

Labor had more than a year to find ways of meeting their objectives stated as being 'debt reduction, schools and health with wealthy to pay'.

A twiddle or two of spending and tax rates would have sufficed. Instead they opted to damage dividend imputation, creating many perverse outcomes, some patched on the fly with exceptions and with the new tax likely not raising expected revenue.

That seems to indicate Labor ignorance.

Now Labour are relying on public's ignorance.

March 01, 2019

"That seems to indicate Labor ignorance."

And cynicism

Robert Goodwin
February 28, 2019

Closing down a smsf to transfer to a industry fund will simply mean that most if not all the franking credits will be absorbed by that funds fees? Chris Bowen needs to answer the question as to why he is prepared to allow refunds of franking credits to industry /corporate fund pension members but not to smsf pension fund members

February 28, 2019

Hi Graham,

Why the promotion of this reader's letter and then with no apparent further comment?

February 28, 2019

Hi Think..this is the Jane that sent the email to Graham.

If you had attended any of these Parliamentary Enquiries, you would understand the position all the attendees will find themselves in, in the future, I.e., Much poorer. My frustration came about due to the lack of empathy from the ALP Parliamentarians present, due to them stating this was purely a political exercise! Of course it is political, that’s why all these self funded retirees have attended all around Australia. Just hoping, and hoping, the ALP reps might comprehend the effects of their policies. There were women there, whom live off their investments, singles, whom will be the biggest losers. The Aged Pension cut off being much lower than for a couple. But no, their response was quite disheartening, (not sure about the situation their own parents will be in?).

February 28, 2019

Hi Jane,

I understand the impact to many and it will be significant for my parents with a SMSF in pension phase. I would fully support an alternate proposal by Labor or the Coalition but at the moment I am not hearing of one from either party or those lobbying against it.

I haven't had the Inquiry come to where I live but I don't think it will impact the Labor policy, they know what they are doing by now.

John Abernethy
February 28, 2019

An excellent analysis Graham and well said Jane Abbott.

An observation I have, which flows from your analysis Graham, is the role of the trustees of Industry and large APRA superannuation funds. Particularly after the recent Royal Commission and the Productivity Commission review into superannuation.

In particular the Royal Commission noted the inherent conflict of interest of some trustees of retail funds. In doing so it also noted the duties and roles of superannuation trustees in general.

That leads me to reflect on the role of trustees of large funds if the cash rebate franking laws are changed.

If large funds with accumulation members (tax payers) and pension members (tax credits) arrange their funds taxation returns to minimise tax paid, then the trustees of this funds have a heightened level of responsibility.

The utilisation of tax credits, transferred between members whom are not known to each other and are unrelated, is a massive tax minimisation scheme.

I wonder whether the ALP has even considered the revenue ramifications of this loophole, particularly if SMSFs flow into large industry funds?

The transfer of tax credits with a cash transfer back between accumulation and pension members is a complicated structure. The tax minimised by accumulation members comes from the largese of pension members by direction of the trustees.

Is that a proper purpose of a superannuation fund? Why does Australia have accumulation taxes if they can be so easily avoided? How certain are the trustees that the cash transfers are properly calculated in every case for every member?

The list of issues is significant and they would be clear to see if there was a proper review of the taxation of superannuation before changes are made. Further I doubt whether many trustees actually appreciate their liability in sitting above such a structure.

Australia urgently needs a proper review of Superannuation given the benefit of over 25 years of operation. The ALP would be well advised to conduct such an enquiry before it creates a mess and in any case the Government should call one immediately to minimise the stress being created by the current debate and before it is too late!

John Abernethy
Clime Capital Limited

Graham Hand
February 28, 2019

Hi John, agree, the trustees will need to learn exactly how one group of members in an investment option without franking credits (say cash) should pay another group who should receive the credits (say Aussie equities), and whether these transfers are equitable.

March 01, 2019

In principle, the franking credit trading rules should prohibit these transfers.

March 01, 2019

John, a point well made. However, the transfer of taxation benefits between accumulation and pension members occurs now where pension members can earn franking credits for the Fund and it is up to the Fund to have a policy in place for the allocation of such tax benefits. Most funds should have a policy in place to cover this. From what I have seen a typical policy would be to continue the imputation through to the underlying (group of) member(s).
Where policies will need to be reviewed even if for the chance of franking credits (and foreign income tax offsets) exceeding tax payable from net taxable income. It would seem logical for the new limited imputation to hold true through to the member which would result in the pension members receiving a scale back of franking.

March 04, 2019

Re John Abernethy
What is not clear about the Labor proposal is why a SMSF member in pension mode, therefore at zero tax rate, should be any better off in an industry or Retail fund.
If these funds have members in both zero pension tax rate mode and 15% accumulation mode then, at least in my expectation, tax payable and total amount payable or refundable by any fund would require at least a two part calculation under the Labor proposal of no excess franking refunds :
For pension members, any excess (if there is any) of the sum of assessable income including their franking credits, less exempt pension income, would be taxable at 15% with tax payable offset by available franking(and any other) offsets to determine amount payable or refundable. Excess franking offsets are not usable to create a refund.
For accumulation members the sum of assessable income including franking credits would be taxable at 15% with tax payable offset by any eligible credits, other than franking credits, to determine a refund or if a residual is stlll payable then offset by all or sufficient available accumulation member franking offsets to reduce the amount payable to zero but without any refund. Again, excess franking credits are not usable to create a refund.
Total amount payable or refundable would be the sum from the two groups.

Note however, that there is a basic argument that the calculations should be on an individual member basis with the entity outcome being the sum for all members.

What is not clear is why a SMSF member moving to an Industry fund should be any better off.

March 04, 2019

Presumably the tax office directive re pooling for funds arises from the legislation in 2000. Following the change to the Labor proposal if legislated, it would be expected that the tax office would apply the principle involved of individual member determination and direct funds to determine their tax on a sum-of-the-individual basis. It's only computer systems, not rocket science.

Rob G
February 28, 2019

Graham is correct. With any pooled fund the handling of franking credits is opaque and it is almost impossible to trace your entitlement unlike a SMSF or an Individually Managed Account. The "reason" is the 45 day rule - with cash flowing in and out, the Funds need to "average" their crediting rates out and can apply an ATO sanctioned haircut on tax. That leads to two conclusions:

1] Retirees in pooled funds RIGHT NOW are likely NOT getting 100c in the $ of their franking credit entitlements

2] Closing your SMSF and moving to an Industry or Retail Fund is NOT going to automatically save all your franking credits but you will find it really hard to know!

Lastly, the Industry Funds are just sitting back and doing nothing to explain just how they would treat franking credits for retirees post Shorten - happy to allow the fears to fester

Brian Hall
February 28, 2019

If I was still able to work I would have PAYE tax deducted. If I also had some fully franked shares the imputation credits would in effect give me a refund of my PAYE tax. Hardly fair

February 28, 2019

A good article for someone prepared to not lump super funds types into binary outcomes. Yes I know some Retail funds that will lose out as I know some SMFSs who will not, shock horror I know.

A word of caution, if you are in an SMSF and have identified a fund you will move to (if it all happens) who will continue to receive credits, you need to know how they distribute them amongst their members. As expressed by some others this might not be easy to get an answer on. Again 'not all public funds are the same'.

Graham Hand
February 28, 2019

Hi Think, yes another good point, no use going to a public fund without knowing if your particular account or option receives the franking benefit. Will they tell you?

February 28, 2019

Where they do I am sure (any fund on the ball) they will tell you but where they don't you might find it harder to get an answer.

It wouldn't (traditionally) be part of the standard knowledge call centre staff are trained up on so any answer will likely take time.

February 28, 2019

Great article Graham. How many members are there in First Wrap? I ask because this highlights that Chris Bowen is wrong when he states only 4% of Australians are affected. There are 50 large APRA funds like FirstWrap who will lose franking, so the number of people affected is way more than 1 million.

February 28, 2019

AV - if this gets through all sorts of structures will come out of the woodwork. Expect to see more enterprises established as trusts so that profits can be distributed pre tax. Airports, toll roads, windmills, solar power stations etc, can be established in this manner.

On imputation they will be subject to the 45 day rule, meaning that you must have economic exposure to the share for 45 days. But expect much more trading around dividends as it will make more sense for a super fund in pension mode to sell cum dividend and buy ex dividend.

February 28, 2019

I am interested to know if there are any moves in the financial sector to develop entities that will be able to "borrow" shares attracting imputation credits from those people unable to utilise them, and then "return" the shares to the original owners.

I imagine that while holding the shares, the entity would be able to "lend" the same shares out to those who can use the credits.

Of course, this would assume the ALP win government AND legislation is actually passed in the Senate.

david street
February 28, 2019

Self funded retirees are a soft target and while the polls are running as they are the ALP are unlikely to make any changes to their unfair proposal so I (as a lifelong ALP voter )will be doing exactly what Mr Bowen suggests and voting against them and anybody who wants this policy ditched will do likewise.

Jan H
February 28, 2019

Hear, hear, David Street. BS and his cronies are sadly ill-informed if they think all shareholders vote LNP. I have been a Labor supporter since the Vietnam War days. Until this issue emerged, I held the Labor team in high regards. But the hubris they now display and, quite frankly, lies they are promulgating to win votes, is utterly disgusting. Only a couple of days ago BS said he was all about consultation and inclusion but says he is "not for turning" All of them flatly refuse to answer people's emails. Their minds and hearts are shut tight. Have they forgotten that they answer to the electorate not vice versa? Their attitude is very confusing and shocking! If Labor can't be trusted to act fairly and reasonably on this issue, I doubt they can be trusted on any of their other policies. They are completely duplicitous. As they say: "They are dead to me".

February 28, 2019

Very interesting! I would assume that most industry funds have a very high proportion of accumulators and therefore can use their franking credits without any problems. Retail funds and wrap accounts are more likely to be used by retirees who have been to see a financial planner so may not be able to use all their franking credits and would therefore lose out as a result. It would definitely be useful to know which funds can and cannot use all their franking credits!

One possible solution for some of these larger funds might be to buy the shares indirectly via a total return swap from an investment bank instead of buying them directly. The bank could then sell the attached franking credits to a buyer who can use them, and give the full return (minus a small cut of course) back to the original super fund?

Cranky Pants
February 28, 2019

The investment bank can't on-sell or use the franking credits, so this won't work (i.e. the fund won't get the benefit of franking credits).

February 28, 2019

The proposed policy will have a significant effect on my retirement income. However, given that I can’t simply transfer my existing share holdings (so I’m told) into an industry/retail fund, my only option is to sell them and transfer the cash. To do so, because the banks and Telstra have taken a battering recently, would mean taking a sizeable capital loss which I’m simply not prepared to do.
A rock and a hard place.

March 01, 2019

Hi Peter,

There are super product providers (e.g. some wrap products) out there that will facilitate the in specie movement of SMSF shares.

February 28, 2019

Australian Super told me they don't comment on proposed policy so can't advise if investment returns would be affected. Separately, why aren't defined benefit pensioners being affected? The argument that a retiree getting $70k and a tax refund is unfair compared to a nurse on the same income paying tax surely means getting $100k tax free from a defined benefit pension isn't fair. I'm going to fall over laughing if crossbenchers in the Senate will only support the policy if it denies refunds to Unions aswell. Or that large funds have to calculate tax for accumulation members and pension members separately.

March 01, 2019

Australian Super has commented publicly on this very forum to very direct questions on this matter, and stated very clearly in my opinion, that Members in pension phase are credited their full value of franking credits i.e. they are not used to offset the accumulation members tax. But I'll believe it when I see a clearly set out super statement with them highlighting the amount refunded - oh, and pigs may well fly.

February 28, 2019

There is no discrimination as The democracy principles are in tact Jane. A policy has been tabled prior to the election. The Australian public will vote, and a party will be elected to govern. The polls oscillating around 54-46 on a 2PP vote suggest this issue is of minor concern and further proof that the vested interest and lobby groups merely represent a minority view.

Rob G
February 28, 2019

David - you are wrong. As it stands, the Bowen proposal could result in identical portfolios having different after tax outcomes. Not only between a SMSF and an Industry Fund but also between Industry Super Funds depending on the % of Members in Accumulation or Pension mode

That is both discriminatory and ridiculous.

February 28, 2019

but it would be a democratic outcome where everyone has an equal say (1 vote) would it not (no guarantees of equal outcomes)?

I don't quite understand Jane's letter especially having not been at the meeting. How does the assertion the meetings are turning into a political campaign mean that they are also undemocratic?

I don't know if this is the first Government inquiry into an opposition's election policy but it doesn't bode well for the future in my view.

February 28, 2019

Rob G, all the best for Election Day, I hope you get the outcome you are seeking

February 28, 2019

Labor's proposal made law would make franking credits worthless to all pension account holders - except those making a deal with accumulation account holders in the same fund.

Would not the accumulation account, non-pension account holders say at best "we will 'buy' your otherwise useless franking credits for X cents in the dollar - like it or lump it" [where 0 <= X <= 100].

Geoff F
March 06, 2019

While this is off topic from the main article, I offer the following response to your comment ...
I am no expert on "game theory" so my thought may not be correct - and so would appreciate an expert on same to add their input - but i would expect pension holders in ur above example to not accept anything less than $0.50 in the dollar.

March 06, 2019

"not accept anything less than $0.50 in the dollar":

Two sides to a deal;:
*. pension accounts will take the best offer available >= $0.00
*. accumulation accounts will offer:
**.. $0.00 if their franking credits >= their tax liability,
**.. $1.00 if their franking credits < their tax liability.
***... $X where they play the franking credit market.

March 07, 2019

Except that all the funds are pooled, which is why they can net these liabilities and credits against each other. If you directly owned these assets you couldn't move the credits across to another tax payer.

February 28, 2019

Good practical point to raise. This is somewhat similar to unrealised capital gains on trusts which have shrunk in size.

Geoff F
February 28, 2019

Good article Graham - all responsible funds should state where they expect to sit on the spectrum of their fund's ability to absorb, or not, the franking credits their fund receives. Of course, this ability to absorb the franking credits may change over time. Then watch the potential transfer-the-super pass-the-parcel game begin, at least by people who might watch this metric.
As to Jane's comments, I understand her anger. The root cause of this issue is the divisive nature of the policy itself, and it's uneven applicability and consequences, and the mixed bucket of exceptions. For the Labor committee members to say that the democratic response to the policy is a political one, misses the point, and is simply a diversionary tactic, because they can't logically argue against the specific uneven consequences of the policy.

Jan H
February 28, 2019

Geoff F; I agree. If people attend a meeting in good faith expecting their concerns to be heard and understood, it is an undemocratic process if the supporters of the plan (Labor Committee reps) called the Inquiry a sham and the LNP Committee reps require attendees to sign their petition. Both sides are guilty of corrupting the democratic process. And the losers are the shareholders, i.e. the voters. Many people spent a lot of time writing considered and well-researched submissions to the Inquiry only to find that their efforts are being totally discredited by both Labor and LNP. Any wonder people are furious.


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