SMSFs likely to rethink strategies if imputation credits are changed

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Labor’s proposal to change the way dividend franking credits are treated has both its advocates and its critics.  Regardless of one’s point of view, there is no doubt that any plan that removes imputation credit refunds will negatively impact self-funded retirees, and those hoping to be self-funded retirees, and result in them rethinking their investment strategies.

Michael Hutton

While the current proposal could impact any share investments held personally ­– and potentially also investments held through a family trust or investment company – it is understandable that self managed superannuation fund (SMSF) members feel particularly targeted.

At a time when self-funded retirees, and those with ambitions of being self-funded, should be applauded for not relying on government support, the landscape seems to be changing.  Such retirees are now, to all intents and purposes, being penalised for their independence.

Some argue that the proposed changes to dividend imputation credits is an issue of fairness.  In my view, what is not fair is that Labor’s proposal is squarely aimed at self-managed superannuation funds, and that union funds and retail funds will mostly be unaffected.

It is surprising that a tax change has been suggested that applies solely to one section of the superannuation system, but not to others.  This is new, and definitely unwelcome.  In the past, any tax changes to the system – such as to contribution limits, or the imposition of $1.6 million pension account balances – have applied across the board to the entire superannuation industry.

The proposed change will have the greatest impact on self-funded retirees who fall just outside the assets test thresholds. A retiree who is receiving just $1 of the age pension will be entitled to both a personal tax refund or excess imputation credits and also their super pension receiving a tax refund.  As a result, they will be significantly advantaged over those who fall just outside the assets test limit, which is currently $837,000 for a couple who are home owners or $556,500 for single home owners.

If the changes come into effect, we will undoubtedly see SMSF members making changes to their investment strategy to try to minimise their losses.

In the first place, people will be encouraged to look for ways to reduce their investment assets, in order to receive both greater tax refunds plus more age pension.

Another impact of the proposed changes is SMSF members will likely reduce their investment in Australian shares.  Imputation credits add about 1.6% to the return on those shares.  In situations where this benefit is lost then the relative attractiveness of Australian shares as an investment sector will be diminished.

Relatively speaking, international shares, cash and property may become more attractive, and so allocations to these sectors may be increased.

And finally, people will find they can easily circumvent the changes, simply by adjusting the investment mix and/or transferring the Australian shares part of a portfolio to a “super wrap” type retail fund that will refund the imputation credits due on their account.

With the Government’s announcement to increase the maximum number of SMSF members from four to six there will likely be more families that treat an SMSF as a true family investment vehicle. Younger family members who are accumulating super will be added to use the credits that their parents, in pension mode, may otherwise have lost.

As a result, the change is unlikely to achieve its desired result, which is to boost the government’s budget.

Perhaps the only true outcome from the changes will be to continue eroding confidence in our superannuation system.  It is difficult to encourage people to put more into super, when the money is locked away for a long period of time and the benefits continue to be taken away.  It seems that for many people, they will be better off having a lower amount in super and receive increased age pension payments in retirement.

These latest changes come on top of the major rejig to retirees’ investment situation resulting from the Coalition’s changes to superannuation that came into effect 1 July 2017, including severe limitation on super contributions, imposing of $1.6 million cap and changes to death benefit payouts, amongst other changes.

If successive governments are looking for ways to turn people away from saving for their own retirement, and encouraging them to seek government assistance, then they are certainly going the right way about it.


Michael Hutton is head of wealth management at accountants and business and financial advisers HLB Mann Judd Sydney.