In the lead up to the Federal Election one item that has sent a shiver of fear through SMSF Trustees is the proposed removal of franking credit refunds.
This announcement, first made in early 2018 was an early prelude to a campaign measure by Labor in light of this years Federal Election.
While this reform is designed to save cash for the Federal Budget – it has been promoted as only affecting the big end of town. But let’s consider the following example:
Here we have 2 individuals, both retired, each with their own SMSF. They invest their balances in listed shares (80%) and cash (20%). Fund A has a total member balance of $750,000, and Fund B has a member balance of $5,000,000.
|Fund A||Fund B|
|ECPI||100%||32% (i.e. $1.6m pension)|
|Dividend yield (fully franked)||4% cash (i.e. prior to franking credits)|
|Fund A||Fund B|
|Dividend||$ 24,000.00||$ 160,000.00|
|Franking Cr||$ 10,285.71||$ 68,571.43|
|Interest Income||$ 3,000.00||$ 20,000.00|
|less ECPI||($ 37,285.71)||($ 79,542.86)|
|Taxable Income||$ –||$ 169,028.57|
|Tax @ 15%||$ –||$ 25,354.29|
|Franking Cr||$ –||($ 25,354.29)|
|Tax payable||$ –||$ –|
|Total benefit||$ 27,000.00||$ 205,354.29|
You can see that Fund A loses all refunding of franking credits – therefore getting no benefit of any of these, as it has no taxable income (given the members balance is 100% in pension mode).
Fund B however, by virtue of its taxable income, actually has capacity to use some of its franking credits, and still lower its tax liability. As a result, while its overall yield is also lower under Labors policy, it is not as impacted as Fund A. Hard to argue that it is only a tax on the wealthy, when the hardest hit are those that can least afford it.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page.