I have recently read an Australian Financial Review opinion piece from John Maroney, the CEO of the SMSF Association, Australia’s premier independent professional body representing the Self-Managed Superannuation Fund (SMSF) industry.
The article details how key Labor policies, if elected, will have an impact on SMSFs. Below I have extracted important pieces from the article.
The most significant and publicised policy change relates to the ending of refunding of excess franking credits. SMSFs that receive franking credits for the tax paid on Australian companies will often receive a refund of the tax paid at the company level. The ability to have access to franking credit refunds, has been a major been a major foundation strategy for a large number of SMSFs in their retirement income planning. It is estimated the change in policy by Labor would likely result in an average decrease in retirement incomes of 10% for SMSF members in retirement phase.
Under Labor’s proposed policy (it is still unsure whether this policy may change going into the election), SMSFs with a member receiving the Age Pension on 28 March 2018, will still be able to get a refund for franking credits received to the SMSF under Labor’s “pensioner guarantee”. Those who begin to receive the Age Pension after this date will not be eligible.
So with this potential change to the treatment of franking credits, what can SMSF Trustees do now?
Consider diversifying asset holdings away from Australian shares that have attracted fully-franked dividends to other income yielding assets, property trusts and fixed interest investments. It should also be remembered, however, that franked credit refunds are only part of the overall return of Australian shares. Another point to remember is that Australian shares tend to have higher dividend yields than international shares, still making them attractive from an income perspective.
SMSF trustees could also consider adding adult children to their funds to increase the fund’s taxable income to offset franking credits. However, this comes with the added complexity of having members with vastly different investment horizons and goals in the same SMSF, calling for careful management.
Most large funds would still be able to pass on the full value of franking credits as they have enough taxable income against which to use the credits. Many commentators have noted the unfairness of this aspect of Labor’s proposal, so there may be further changes before implementation.
In addition to changes to franking credits, Labor has also proposed changes to superannuation contributions and limited recourse borrowing arrangements (LRBAs).
If elected, Labor has signalled it will also do the following:
- cut the after-tax annual contribution limit to superannuation from $100,000 to $75,000;
- repeal the ability to carry forward unused concessional contribution cap space and make “catch-up” contributions; and
- reverse changes that allow all taxpayers to contribute to superannuation and claim a tax deduction for doing so (personal deductible contributions);
- they will also lower the income threshold for the extra 15 per cent tax high-income earners pay on concessional contributions from $250,000 to $200,000.
Accordingly, SMSF members may want to consider their financial circumstances to make the most of the current contribution rules that could allow for more flexibility and scope to contribute to their SMSF before the election.
Further, with Labor proposing to ban new LRBAs if elected, SMSF trustees who believe that a geared investment strategy is right for their fund should consider pursuing this before the next election. This should always be done with specialist SMSF advice and with a long-term investment strategy.
John Maroney’s article aligns itself closely with an Investment Seminar we hosted recently, presented by Jonathan Bayes, the Chief Investment Officer for Prime Financial Group. The majority of the concepts outlined in this article were discussed.
If you wish to be pro-active in dealing with this proposed changes, meet with your SMSF specialists at Green Taylor Partners (Peter Cramer, Kerry Schultz and myself) and we will work with your financial adviser to ensure you are prepared for what may happen in the 2019 year and beyond.