The Labor Party’s proposal to abolish refundable franking credits unfairly targets self-managed super funds (SMSFs), distorting the key tax principle of horizontal equity, SMSF Association CEO John Maroney says.
Addressing the House of Representatives Standing Committee on Economics Inquiry into the implications of removing refundable franking credits in Adelaide today, he says the proposal will have a negative impact on SMSF members compared with individuals who are members of large superannuation funds.
“SMSF members in retirement phase will generally lose the benefit of franking credits if they are not refundable, while large superannuation funds can ensure that the full value of franking credits received are utilised against income derived by younger members still in accumulation phase.
“Therefore, an individual in retirement phase in a large superannuation fund with the same balance and same allocation to listed equities as an individual in an SMSF will be substantially better off by still receiving the full benefit of franking credits. This is a clear departure from the principle of horizontal equity in the taxation system.
“The 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.”
Maroney also told the committee that the policy would encourage the drawdown of capital and further increase reliance on the Age Pension, putting more pressure on the Federal budget.
“The retirement income incentive for a home-owning couple to save upwards of $850,000 is now severely reduced under the non-refundable franking credit proposal.
“This is because, from an income perspective, such a couple may be better off with less assets, a part-Age Pension and refundable franking credits. It actively discourages people from saving for a self-sufficient retirement.
“In addition, the proposed policy targets the wrong SMSFs. Labor’s policy announcements suggest it has the top 10% of SMSFs with assets exceeding $2.4 million in its sights.
“But these funds will still be able to use franking credits to offset tax they pay on superannuation fund earnings related to assets over the $1.6 million transfer balance cap that has been in place since 1 July 2017.
“SMSFs with assets below $1.6 million, whose members have worked hard to provide for a reasonable retirement and do not receive the Age Pension, will lose 100% of their franking credit refunds and about 10% of their income.”