Labor’s excess dividend imputation credit policy unfairly targets SMSFs

SMSF Association Media Release

13 March 2018

The SMSF Association strongly opposes the Federal Labor Party’s proposal to cancel cash refunds for excess dividend imputation credits.

Association CEO John Maroney says refundable franking credits have been a well-established principle for nearly two decades, having been introduced on 1 July 2000, and many SMSFs in retirement phase have partly built their investment and income strategies around this policy.

“At the very time retirees are looking for certainty with the superannuation system, especially considering the enormous changes that took effect on 1 July 2017, Labor’s proposal will again undermine confidence in the system and send many retirees back to the drawing board to rethink their retirement income strategies.

“It’s our contention that this proposal will affect more than one million Australians saving for their retirement and other purposes. Our calculations show it will cut about $5000 of income from the median SMSF retiree earning about $50,000 a year in pension income. To be saying these people won’t be paying any more tax is just semantics.

“This hit on retirement incomes clearly is not just affecting the very wealthy and can substantially damage the lifestyles of retirees who have prudently saved and are carefully drawing down on their retirement savings. Viewing all SMSFs as belonging to the mega-rich is an over simplification.

“This change would single out SMSF members as one of the few groups of taxpayers who will have the profits of companies they own taxed higher than their marginal tax rate. Instead SMSF members in retirement phase will have company tax paid on their share of a company’s profits when none should be paid at all.”

Maroney says the current system should remain for three key reasons:

  • It removes double taxation of corporate profits, promotes corporate discipline in capital management and encourages corporate compliance with tax obligations;
  • Altering dividend imputation would have a significant impact on many superannuation funds that are significant investors in Australian equities; and on retirees for whom refundable franking credits increase their retirement income;
  • Changes to dividend imputation require long transitional timeframes to enable retirees to respond and other savers to revise plans.

Maroney says it is the Association’s view that this proposal “unfairly targets” one sector of the community who have been diligent in saving to be more self-sufficient in retirement.

“SMSFs put strategies in place under the existing rules – in the instance rules that have been in place since 2000 – only to find that politicians have again proposed to rewrite the rule book.”
He says changes to dividend imputation could also have unforeseen consequences.

“It’s likely to lead to a shift in superannuation fund investment strategies. Funds seeking yield to deliver retirement income, especially SMSFs which are paying income streams, would need to shift their asset allocation towards investments which can provide increased yield.

“This may lead to funds having to shift to a higher risk asset allocation in the retirement phase.

“Another possible outcome is SMSFs looking to shift investment from Australian companies to foreign companies with the after-tax return on domestic companies less attractive.
“Although greater diversification may benefit funds, shifting to a greater asset allocation in foreign equities can also introduce new risks to the fund, such as foreign exchange risk.”

“This could also lead to dislocation in domestic equity markets, given the significant ownership SMSFs have of ASX listed companies. If the full value of franking credits cannot be offered to these investors, then it is logical that they will no longer value their investments as they do now.”

Maroney concludes that Labor’s policy is just another example of politicians seeing superannuation as a cash cow and not for its primary purpose – to ensure people are more self-sufficient in retirement.