The Labor Party’s policy shift to exempt people receiving the Age Pension from its changes to refundable franking credits is a step in the right direction – but still leaves more than one million Australians unfairly disadvantaged by its proposal, including many SMSF members.
SMSF Association CEO John Maroney says while age pensioners currently benefiting from refundable franking credits are rightly exempted by the proposed Pensioner Guarantee, the Association still has “serious reservations” about the fairness and efficacy of Labor’s amended policy.
“The amended policy excludes similar protection to self-funded retirees, many of whom draw their retirement income from retirement savings built over the lifetime in an SMSF to avoid relying on government support.
“These retirees have depended on receiving a refund of the excess company tax paid above their SMSF’s marginal tax rate on company profits to supplement their income in retirement.
“The refunding of excess company tax paid via refundable franking credits has been a long-standing feature of superannuation that SMSF members have built their retirement strategies around.
“Under Labor’s proposal, the only SMSFs exempt are those that currently have at least one member receiving the Age Pension. And in the future, there will be no protection for SMSF retirees who may need part government support to supplement their superannuation income, creating an unfair, two-tiered and complex treatment of SMSF members who access the Age Pension in retirement.”
Maroney says the Pensioner Guarantee exacerbates the effect of Labor’s proposal on SMSF members who have saved to be self-sufficient and avoid relying on the pension.
“Potentially, these SMSF members are worse off than people with less savings but refundable franking credits and a part pension. The end result is to reduce people’s incentive to save for retirement to achieve self-sufficiency.” (see example)
He says the Association urges the Labor Party to reconsider its initial policy to ban the refunding of franking credits because of its deleterious effects on the future retirement income of more than one million Australians who have chosen an SMSF for their retirement savings.
“We also stress that the recent limitations placed on contributions to superannuation and the transfer balance cap limit on tax-free earnings in retirement have already made superannuation more equitable and sustainable.
“The transfer balance cap is limiting excess franking credits that would have been paid to SMSF members with large balances. Under the new transfer balance cap rules, SMSF members with more than $1.6 million will be paying tax on some of their earnings that will offset the value of their franking credits, limiting their refunds.”
Illustrative example of the disadvantage created for self-funded retirees (NB: part Age Pensions cease when combined assets exceed $837,000)
Current superannuation regime:
Couple owns home and has SMSF worth $700,000.
SMSF income: $35,000
Franking credits: $6000
Age Pension (part) $9900
Labor’s proposed regime:
Couple owns home and has SMSF worth $900,000
SMSF income: $45,000
Franking credits: $0 (now $7700)
Age Pension $0
Total: $45,000 (now $52,700)