Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 255

SMSFs, member-direct and Labor's franking

The refund of excess franking credits has been available since 2000. Many SMSF trustees have become accustomed to receiving a large deposit into their bank account at the end of each financial year. If Labor’s proposed changes to dividend imputation become law, the refund will be a thing of the past and trustees will need to rethink their investment and tax planning strategies.

Franking credits will still be beneficial for superannuation funds that have taxable income as the franking will reduce their tax liability. However, many funds, especially those paying a pension, have little or no tax payable and currently receive a refund. They will be the funds that lose out the most.

A flaw in the policy proposal is that the burden of the extra tax will affect one group of investors, those using an SMSF, more than any other. Most large industry and retail funds will generate enough income from contributions and investment earnings to use their franking credits and pass on the benefit to members. This creates the unfair situation where two investors with the same investments, one in an SMSF and one in an industry or retail fund, will be treated differently.

What can SMSFs do to reduce the impact?

Given the possibility that Labor will be in power by this time next year, SMSF trustees and their advisers are already contemplating strategies to limit the effect of the potential change. These strategies include:

  • Changing the investment mix to include investments that don’t provide a franking credit such as property trusts, overseas investments, and companies that pay unfranked dividends.
  • Many high net worth super fund members currently receive a pension simply to reduce the tax liability of their SMSF and not because they need the income. In future, this strategy may simply increase the amount of franking credits that are lost, and members may leave their superannuation in accumulation.
  • Children who are making taxable superannuation contributions may join their parents’ SMSF. The taxable income of the fund will rise and use up some of the excess franking credits.
  • Closing the SMSF and have their investments managed by an industry or retail fund.

There is another strategy that may be of benefit to some investors: member-directed investments.

What are member-directed investments?

Generally, when joining an industry or retail fund, investors are given a choice as to what fund category they will invest in. For example, they may be asked if they are a 'Conservative', 'Balanced', or 'Growth' investor. Some funds also provide another alternative where the member can choose specific investments. This alternative is generally known as 'member-directed investments'.

The member-directed investments option allows the member to buy and sell investments, similar to using an SMSF. It is managed through the superannuation fund website. Brokerage is charged at rates comparable to the major online brokers, and the administration fee, usually under $400 through industry funds, is reasonable when compared to fees charged to administer an SMSF.

Where an SMSF provides almost unlimited investment choice, this is not the case with the member-directed investment option. Investments are generally limited to:

  • ASX 300
  • A selection of listed investment companies
  • A selection of exchange traded funds
  • Term deposits
  • Cash

It is not as flexible as an SMSF in other ways. There are limits on how much can be invested in any one asset, usually 20%, along with a requirement to hold a portion of your balance in cash.

Despite these restrictions, this type of product may be beneficial to some investors as shown in the examples below:

Example 1

If no action is taken, the franking credits will be lost. The member would have the option to shift to the member-directed investment platform and limit their investments choice. This could potentially result in a full refund of franking credits.

Example 2

The members could shift $1.5 million into a fund providing member-directed investments and maintain their SMSF for the balance. If the new fund pays an account-based pension, a franking credit refund of $32,143 could be received.

Some final words of caution

Superannuation law (SIS Reg 5.03) states that the trustee is required to allocate income between members “in a fair and reasonable way”. What does “fair and reasonable” mean?  In the case of member-directed investments, the good news is that currently the benefit of all credits relating to shares held are allocated to the member's account. It is hoped that this practice continues if there is a law change. However, we have no guarantee at this point.

In commenting on an article by Michael Hutton last week, a Cuffelinks subscriber, Ramani, did an excellent summary of this issue:

“The option of moving from a SMSF to an APRA (industry or retail) fund such that franking credits that would be wasted in the SMSFs can soak up the fund-as-a whole tax liability would make sense, but only if the APRA fund would equitably distribute the credits so saved back to the members who gave raise to the credits in the first place.

I would urge caution against such an automatic presumption. The black-box of calculating member earning and crediting rates (or the related unit pricing if the fund is unitised) as well as the fuzzy nature of equity among member cohorts, not to mention generic member apathy, militate against it. It would be feasible to check if the trustee would so distribute, and having confirmed it would, prosecute any failure in the new dispute resolution authority might be required. Otherwise, the SMSF members would be ‘donating’ the excess credits to other members without being aware of it, instead of to the Treasury as wasted franking.”

Given the issue's importance, I suspect clarification will be provided by the funds before any change in the law.

It's an important opportunity. According to the Class SMSF Benchmark Report of March 2017, listed shares account for 30.2% of money invested in SMSFs. Therefore, there will be plenty of investors looking for strategies to keep their franking credits if refunds are no longer allowed. Assuming there are no legislative or other administrative impediments, member-directed investments may be a viable alternative.

[Editor's note: We expect a large industry fund to comment on their intended approach on their member-direct offer next week.]


Matthew Collins is a Director of Keystone Advice Pty Ltd and specialises in providing superannuation tax and structural advice to high net wealth individuals and their families. This article is general information and does not consider the circumstances of any individual investor. It is based on a current understanding of related legislation which may change in future.

February 14, 2019

Hi I was on age pension until my wife turned 65 and 6 months last year does that mean I will continue on with receiving the total full amount of credits or have I forfeited that now I am self funded. I don’t think it has been debated I hope you understand what I am trying to say. Thanks Darryl.

Michael C
May 29, 2018

Although I actively monitor my SMSF it is through one of the many well known wealth management companies where I rely on the advice of my financial adviser. If it eventuates that member-directed investments through an industry or retail fund becomes the 'best' option will this be the advice that my fund manager provides? Or is it unlikely because my current investment adviser (company and employee) will no longer be offering me the product that I require?

John Brown
May 29, 2018

Can anyone imagine the total waste of effort expended and loss of confidence in the super system due to proposed changes year on year. If you contribute legally to YOUR fund and can not trust that the stated benefits will be retained as intended who can trust the system ????

John Boardman
May 28, 2018

With the ongoing debate on the ALP's franking credits proposal, I thought I should add in something else that I haven't seen any commentary on in the media. It concerns the impact of the proposed policy on Family Tax Benefits ("FTB")

FTB is paid to families provided they meet the applicable income tests, with there being two main components to FTB, known as FTB Part A and FTB Part B.

For FTB Part A the maximum rate per child is paid if the family's income is $52,706 pa or less. If the family income is above $52,706 pa, FTB Part A is reduced by 20 cents per $1 over this limit. FTB Part A is $182.84 per fortnight per child when the child is under 13 and $237.86 per fortnight per child when the child is 13 and up to 19, if the child meets study requirements. Another component to the FTB Part A is the FTB Part A Supplement, which is paid at the rate of $737.30 per child provided the family's income is below $80,000 pa.

FTB Part B, is paid per family and depends on a couple of tests. If the primary earner in the family earns more than $100,000 no FTB Part B is paid. For two parent families, if the primary earner's income is $100,000 or below, the secondary earner's income is tested. The secondary earner can earn up to $5,548 pa after which FTB Part B is reduced by 20 cents per $1 over $5,548. The maximum rate of FTB is $4,055 per family, if the youngest child is less than 5 years old. There is also a Part B supplement of $357.70 per family per year.

The problem with the ALP's franking credit policy is that although the franking credits will no longer be refundable, the franking credits will reduce the amount of FTB, as the franking credits will continue to be included as part of the family income for FTB purposes as follows:

Family comprising of two parents and three children under 13.

Primary Income earner's salary from their job is $75,000 pa.

The secondary earner, stays at home to look after the children and does not work in paid employment.

The couple have been saving hard to get a deposit on a home and through this process have accumulated $100,000 in savings. To maximize returns, the funds are invested in the secondary earner's name in fully franked shares paying a 5% dividend. This equates to dividend income of $5,000 pa and franking credits of $2,142 pa.

The family's total cashflow income before tax is $80,000 ($75,000 + $5,000).
The family's income before tax for FTB purposes is $82,142 ($80,000 + $5000 + $2,142).

Although the family will not get a refund of the franking credits, the additional $2,142 of family income will reduce the amount of FTB Part A by $482.40, the amount of FTB Part A supplement by $2,211.90 and the amount of FTB Part B by $318.80.

May 29, 2018

Agree John. Another example of our policy makers or policy advisers in Canberra not thinking through all aspects of the plan. ALP have already "back flipped" for pensioners. What happened to protecting the young Aussie couples who are seeking to raise a family and secure a home. If this is not fixed, it smacks of hypocrisy on the part of the ALP.

May 25, 2018

James' comments highlight an inequity in the ATO system of tax collection.

ATO requires (after the first year of assessment) taxpayers to pay as you go (PAYG) the annual tax liability without waiting for the year to be completed, by estimating the likely tax (with an uplift of 10%). Taxpayers must pay this periodically during the year, but can adjust it if they believe the amount demanded is too high in the light of the likely year end position. There are penalties for material under-estimation.

Contrast this with a SMSF that under current rules is eligible for a large refund (say a pension phase fund or even a hybrid fund). The fund must wait till it lodges its return to obtain the refund. Not for the taxpayer PAYG in reverse. Perverse?

For an individual, it is possible to reduce taxes withheld from salary taking account of expected franking credits, but her again, asymmetry: you can only reduce it to zero, cannot make it a refund.

They say there is no symmetry or equity in tax. The above is an example!

May 25, 2018


The work test that until 30 June 2017 required members to have no more than 10% of their income from employment to be eligible to claim concessional contributions has been scrapped from 1 July 2017 (17/18 tax year).
But the work test for the over 65s to contribute to super (40 hours in 30 continuous days) remains.

I am sure tax experts will correct me if this is wrong.

May 28, 2018


The work test is proposed to be modified from 1 July 2019.

From this point in time if you are aged 65-74 with a total super balance under $300k in the last year that you met the work test, you can make voluntary contributions for 1 single year afterwards without meeting the test (subject to all other rules like caps).

May 25, 2018

Hi Graeme
Would a stay at home mother receiving FTB parts A and B be defined as receiving a benefit under the ALP policy. I have read the policy and it's not at all clear.

Graham Hand
May 25, 2018

Hi Worried, probably not although who knows what the final legislation will say. The Labor Party policy proposal says:

Under the Pensioner Guarantee:
o Every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds. This includes individuals
receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.
o Self-managed Superannuation Funds with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes.

May 25, 2018

You are correct Jon, most superfunds pay the franking credits from "their" money well before they receive any credit from the ATO. The ability of the superfund to do this depends upon its underlying ledger system to correctly forecast the overall funds net tax postion. If the fund has outdated systems it may take them longer or they may only pay any net credits after they have received the ATO return which could be some months after the dividend.
At a higher level, the superfund needs to be a net payer of tax to rebate franking credits, if it has many older pension phase members (tax free) then this may be not be feasible.
i use and they rebate franking credits currently at the time of dividend and have wide range of shares/LICs/overseas stocks and a simple death benefit form.

May 24, 2018

It should also be possible for John to contribute up to $25,000 each year concessionally and soak up to $3750 of his 15% contribution tax liability from the franking credits which would otherwise be wasted, until age 65. After age 65, the work test must be met.

Like the food chain hierarchy where nature spawns predators ready to feast on available prey, every cleverly thought-out (or not) revenue measure attracts tax accountants and lawyers in their hordes to legally game the system. It has always been thus, and always will be. The immortal Kerry Packer be praised....

May 25, 2018

The work test is no longer? i think anyone can contribute up to age 75 now?

May 28, 2018


That isn't correct.

Right now the work test remains and we don't even have the exposure draft of the Federal Budget proposal for this measure.

The proposal is that, those aged 65-74 from 1 July 2019 with a total super balance under $300k in the last year that they met the work test, can make voluntary contributions for 1 year afterwards without meeting the test (subject to all other rules like caps).

Jon Kalkman
May 24, 2018

Matthew has certainly raised an interesting option. My enquires with the industry fund that I left to establish my SMSF reveal some interesting points that I offer here.

My holding of shares, chosen from their extensive list, can be no more than 85% of my super balance. The remaining 15% must be in one or more of their other investment options such as conservative, balanced or growth etc
In pension phase the pension can only be paid from the other investment option and must also hold at least 13 months of forward pension payments in cash. The member-direct option must also hold a transaction account to manage the share trading in that option.

The main problem, as I see it, is that the fund is the taxpayer (not the member) and that is why they can use the accumulated franking credits to pay the overall tax in the fund. They say my franking credit will be credited to my account as “soon as is practicable” after the dividend is announced, so clearly this money is paid from their bank account before their tax return is lodged. That puts me at the mercy of their policy which could change at any time.

More important, it means that the fund is the owner of the shares in my account, not me. If push comes to shove, for example, if there is insufficient money in the other investment option to pay my pension, they will sell “my” shares without my consent.

The information on death benefits is scarce with this option and there may also be a problem with holding a reversionary pension in this arrangement, but I could not find enough information on that.

All this means loss of control of how I invest, and how much cash I choose to hold. So while it would relieve me of the compliance obligations of a SMSF, it clearly is not like investing in a SMSF and introduces an additional set of regulations and conditions on top of everything else. I suggest that you do your research thoroughly before you jump – it may be difficult to change your mind.

May 25, 2018

Jon, it is the fund and not the member that pays tax, and this is true for SMSF, industry fund, retail fund, or any other type. It is also the case that, regardless of the fund, it is the fund that is the owner of the shares and not the member. The assets are pooled, but each member's benefit separately accounted for.

Just ask the Fund to confirm its policy on franking credits each year in writing.

When you say that "if there is insufficient money in the other investment option to pay my pension, they will sell 'my' shares without my consent" - what would you expect them to do, given the Fund is legally required to pay you a pension?

Finally, if you die, then your pension account would become part of your estate, and you can apply a Binding Death Benefit Nomination to the account. If the beneficiary is not of pensionable age, then an Account Based Pension could not be paid to them, but they can keep the money in the Accumulation part of the Fund instead.

Yes, do your research thorough before you jump, but also before you stay where you are as well.

Peter C
May 27, 2018

Control is overrated. I am not interested in control, only performance. This is why even though I have more that enough in super to commence a SMSF, I have chosen not to (much to the annoyance of my accountant who was hoping to make a few thousand dollars setting up the fund, plus a couple of thousand every year in admin fees).

So what have I done? My super in an extremely low cost industry fund which uses an indexing strategy. The breakup as I understand it is about 30% in Aussie shares (using a low lost index fund) about 35% in overseas shares (using low cost index funds), and the rest in fixed interest and cash. Simple and effective, and over the long term, (such as the thirty years or so I expect to remain in super), it will outperform about 70% of all other options, including SMSF`s with a similar investment profile.

The other benefit is I have none of the compliance nightmares of running my own SMSF, none of the worry of being fined by the ATO for making an error or lodging late, none of the meetings with accountants or other advisors or poring over share prices or research notes, and no staring at my computer screen.

None of that worry for me. The irony is even though my compliance costs and time spent is lower, using this indexing strategy I will perform better than the majority of funds.

Bizarre isn`t it?

peter farnsworth
July 26, 2018

Great comment Peter C . This strategy may work well for those who have that time frame but i am not sure if it works so well for say those who are doing 15 years or less . Certainly the potential performance is there and as you have mentioned the time involved in compliance is gone . Thanks for the post it has helped me clarify my thinking on a few issues

May 24, 2018

Now I am confused. My case is that I am a fully self funded retiree. I am 63 going on 64.I have been retired for 3 years. I do not receive so much as 1 cent from the government. No health card, rates, car rego, nothing.

My SMSF receives approx $8,000 a year in franking credits. Under the proposed Labor changes will the fund keep or lose the franking credits?

Graham Hand
May 24, 2018

Hi John, assuming no member of the SMSF was a pensioner (in the welfare sense) on 28 March 2018, your SMSF will not receive a REFUND of excess franking credits. However, if your fund is still in accumulation and earns taxable income (such as non-franked dividends, interest from term deposits or property), then you can still use your franking credits to offset the tax. Assuming you have enough taxable income, you will not lose the value of your franking credits. The proposal is only about REFUNDS.

May 24, 2018

Seems that any SMSF trustee who becomes a means tested pensioner after a prescribed date, will not be able to receive franking credits.
At this stage,would this be correct?

Apart from the uncertainty regarding the next election winners,the difficulty is making investment decisions in view of Labor's announcement vagueness.

Graham Hand
May 24, 2018

Hi Mike, that's correct. In an SMSF, under the proposals, a person needed to be 'pensioner' by 28 March 2018.

Matthew Collins
May 24, 2018

Peter and Roy

Sadly, Graham is correct. Below is a link to the Labor party fact sheet which explains what is meant by a "pensioner"

Matthew Collins
May 24, 2018

Hi Ramani

your comments are, again, very interesting.

Given what is at stake, if the legislation is enacted, I would hope that the trustee will provide clear guidance in relation to how they will allocate tax credits.

I certainly agree that nothing should be done until we see what happens politically. Having said that, I have plenty of clients who will be significantly worse off so I think it is healthy to talk about some potential strategies.

May 24, 2018


Thanks for alluding to my comments on the subject. Due to space limitations, I could not elucidate the challenges facing trustees in achieving equitable allocation among member cohorts (and hence members). A lot depends on individual fund rules, crediting rate practices and the sophistication of IT (including legacy systems). Many will recall the recurrent episodes of unit pricing errors APRA and ASIC had prosecuted years ago, culminating in a joint guide. A lot of remediation followed.

For a list of the conceptual complexities, see the two APRA speeches:

The ‘unknown unknowns’ are whether Labor will gain power; whether it will enact the mooted policy; the actual legislation; then critically, How ATO will implement it given Part IVA.

Perhaps we should hold our horses for the time being?

Roy Skabo
May 24, 2018

I thought that Labor had amended its proposal so that existing smsf’s with a member already getting a pension would continue to receive cash refunds of franking credits. Is my understanding incorrect?

Graham Hand
May 24, 2018

Hi Roy, you are correct but the 'already getting a pension' date was 28 March 2018 so it's not expected to be the date when the legislation is passed. Labor estimates there are only 13,000 'pensioners' in this category.

Jo Billerwell
May 24, 2018

Can you clarify pension... is this cover pension mode in SMSF
Not on Govt pension


Graham Hand
May 24, 2018

Hi Peter, that's not a correct interpretation of Shorten's 'clarification', on my reading. He did not say existing SMSFs in pension mode would continue to receive refunds. This is a confusion on what he meant by 'pensioner'. The statement about already receiving a pension on date of the announcement (28 March 2018) was a reference to social security pensions such as the age or disability pension, not a pension from an SMSF.

Labor offered a ‘Pensioner Guarantee’ which protects all pensioners (welfare recipients) from the abolition of refunds except for SMSFs.

From Chris Bowen’s website:

“The Pensioner Guarantee means pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.

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

This means that every pensioner will still be able to benefit from cash refunds.”

May 24, 2018

It should be borne in mind that at the time Shorten made this announcement (a few months ago?), he also 'clarified' a few days later (under pressure) that existing SMSF balances already in pension phase at the time of his announcement would continue to receive franking credit refunds. It remains to be seen how much we can trust a pollies' word!


Leave a Comment:



Let's make this clear again ... franking credits are fair

Labor's franking policy is a ticking bomb for all super funds

Cuffelinks articles on Labor’s franking policy


Most viewed in recent weeks

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Welcome to Firstlinks Edition 467

Fund manager reports for last financial year are drifting into client mailboxes, and many of the results are disappointing. With some funds giving back their 2021 gains, why did they not reduce their exposure to hot stocks when faced with rising inflation and rates?

  • 21 July 2022

Welcome to Firstlinks Edition 466 with weekend update

Heard the word, cakeism? As in, 'having your cake and eating it too'. The Reserve Bank wants to simultaneously fight inflation by taking away spending power, while not driving the economy into a recession. If you want to help, stop buying stuff.

  • 14 July 2022

Welcome to Firstlinks Edition 465 with weekend update

Many thanks for the thousands of revealing comments in our survey on retirement experiences. We discuss the full results. And with the ASX200 down 10%, the US S&P500 off 20% and bond prices tanking, each investor faces the new financial year deciding whether to sit, sell or invest more.

  • 7 July 2022

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.