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 | |
| Total balance | $750,000 | $5,000,000 |
| 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 |
| Yield | 3.60% | 4.11% |
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.
If you would like more information, please don’t hesitate to contact Jason Roccasalvo or Brenda Hutchinson.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page.