Franking Credit Removal Proposal
Since the original announcement in March by the Labor Party to scrap imputation credit cash refunds, a concession to pensioners and to some self-managed superannuation funds (SMSFs) has been announced. The concessions allow for the cash payment of surplus imputation credits to continue for those on the age pension or allowances, or for an SMSF with a member receiving age pension.
While this concession may lead to some SMSFs thinking about recruiting a new member who is in receipt of an age pension to the fund, we would suggest SMSF trustees first consider the potential estate planning fallout from adding new members to their fund before proceeding.
The group most exposed to Shorten’s attack are self-funded retirees and SMSFs, particularly those in pension phase.
The bad outcome of the proposal is that high income earners and ultra-wealthy individuals are likely to be largely unaffected, leaving middle-class retirees bearing the brunt. However, even if Labor wins government at the next election, it may either realise the error of its ways due to public protest and abandon this fl awed policy, or have it blocked in the Senate in any case. So, it would be wise to “hasten slowly” before making changes to investment portfolios in response to this proposal. That said, investors should begin thinking about how they may react if the proposal is legislated.
Understand the impact
The message here is clear – total return is the main game, and investors need to keep the value of imputation credits in perspective. A focus on investment fundamentals such as company earnings, which ultimately drive value, rather than focusing simply on franking would be of far more benefit to investors.
Those investors who use multiple investment structures – such as SMSFs, family trusts and/or companies to house their wealth – should analyse which of those structures are likely to be able to continue using imputation credits. The aim would be to own assets paying franked income in structures where the imputation credit can be utilised, and own assets paying unfranked income in structures that can’t.