Great article. The only thing I would disagree with is the loss of the votes of 660,000 SMSF superannuants. I would suggest a large percentage of these would be Liberal voters to start with and a not insignificant proportion of the remainder live in in traditionally safe Liberal seats where their vote doesn't matter. A solution not mentioned may be to transfer to a 'regular' super fund. How easy is it to do this? I vaguely recall figures suggesting that many with small to medium SMSF balances would actually be better off in a regular fund, regardless of the franking credit issue.
Do you know both Host Plus and Australian Super have a balanced option which uses an indexing strategy, and thus have very low fees. In both cases the fees are below 0.30%. There are probably other retail super funds that give you this option. For long term money an indexing option may be a good choice. Warren Buffet is a fan of index investing for the vast majority of people, and so was his mentor Benjamin Graham. It's ironic that 3/4 of active funds under-perform their index over a 15 year period anyway. The other side benefit is of going into a retail or industry fund is you no longer have the massive compliance burden SMSF trustees have,. I swapped a few years ago and am very happy with the performance, and getting my life back.
Thanks Marcus , great article with good advice . I understand that Bill Shorten said in an interview on this subject to some LIC managers before he flip flopped " chasing franking credits would be akin to sending in the Tanks to extract a Mouse" . So its not really clear what will eventually happen should Labor win .
Thank you great article, I am one of the people that it will impact on ,,already started to refocus my stock selection even though been in many of these shares for years ..ETf's is now for me ...,good health before anything richard...
Just looked at the S&P/ASX Franked Dividend Index (10yrs +5.16% p.a.) vs S&P/ASX 200 (10yrs +6.77% p.a.), even accounting for franking credits it looks like the broader market is a better investment. Better still maybe these SMSF's should be investing in the ASX 200 ex Franking Credit Index if such a thing existed.
Great article: hard information and well collated. The best kind of advice. Jo Aldridge Sep.3rd, 2018
Marcus, Useful article, thanks. Why are some of the stocks listed highlighted in blue?
The original intention was to have the cash franking credits non- refundable form 1 July 2019. Has this date been changed to 1 July 2020? I have been unable to find any other reference to this. Does anyone know the source for this information.
Great article Marcus. One issue that has been neglected in the development of the Labor policy is the effect of Death Benefits Tax (DBT) on government revenue. DBT is levied on the taxable component of a member's super balance when they die and it passes to their deceased estate. There will be 17.5% tax withheld on the balance of the taxable component where a member's super passes to a non-dependent for tax purposes i.e.; an adult child or your Legal Personal Representative (LPR) on death. Most of us today have very high taxable components due to the concessional nature of contributions hence, the government will get 15% on entry, 15% on profits during accumulation and then 15% on the taxable component when our super passes to our LPR or adult children. The tax receipts to be realised from the amounts above the $1.6M pension cap either withdrawn from super and invested or commuted back to accumulation are yet to be known however, you would think the revenue pick up will be significant. All this Labor policy demonstrates is they have no clue about tax and superannuation, as do 99% of the population for that, and it's going to be very dangerous to hand Bill Shorten the keys to to the Lodge...but give them to him...Australia has had it far too good for far too long...more than a few out there need to be whacked around the ears and woken up!!
I agree with Dean that many have had it “too good for far too long”. Certainly those taking advantage of discounted capital gains tax, negative gearing that has nothing to do with one’s occupation, tax free >60 super etc. Of course when either side of politics tries to rein in any of this upper class welfare the recipients scream like crazy. Whether partial imputation cuts are the way to go is questionable. I’m sure the smarties will find a way to get around that. I’ve seen better arguments for an all or nothing approach on this one. Not sure why we should be denigrating Labor for actually putting policy out there for scrutiny. Far safer to re-elect Liberal knowing that when they rediscover budget deficits they will be funded by spending cuts that predominately affect those who can least afford them. I can’t argue with Dean that “... more than a few out there need to be whacked around the ears and woken up”.
Useful article, as always. One comment on the principle of this change: it's prudent - and fair. Imputation was introduced to avoid double taxation, not to facilitate the avoidance of tax altogether.
Marcus.....please confirm source of information that start date of Labor plan is 2020-2021, as all sources say it is 2019-2020?
Great article Marcus, thanks for putting some clarity in for me on this future(maybe) apocalyptic event of lost franking credits. The explanation and logic of more cap growth focus in US than divs (with no franking) proves we have become drunk on Franking Creds as it would seem. The fact that doesn't kick in until 2020, didnt know that, gives time to get ducks in order and change strategy of investment focus i.e. growth. ( I agree with you -Property sucks, re illiquid etc) I need Divs and FR creds like the next bloke(or women) but I bought CSL for $30 in '09 , check them out today! Give me 10 growth shares like that and I will give Fr creds up tomorrow! yeah baby! I think it could be underestimated that this will effect 600K of people, most aussies who have Super in aussie shares (which they dont know about) rehash divs and associated Fr Creds back into the funds so everybody will suffer one way or another. More shareholders will go offshore for yield if changes occur to Fr Creds, less investment in aussie companies- Dick Smith will be spewing again! I think more petitions should get signed to send a message to Laborgreens so to put pressure on the next election that this effects way more than figures quoted. We havent had it too good for to long, investors are the ones who take all the risks especially in investing in aussie companies to help them grow to global players and employ more people who will pay tax- keep our snouts in the trough I say!
Has Marcus Padley confirmed that cessation of franking credit refunds is a year after 1/7/19 as all I read says 1/7/19? David Nicholl
To Lorraine, Bob, and David - You're right, my bad (was quoting a news article) - the original speech is on this link from Chris Bowen - https://www.chrisbowen.net/media-releases/a-fairer-tax-sy... - it says “The policy will apply from 1 July 2019, which means it will only affect future earnings and franked dividends that start flowing in following financial year.” – I don’t know if that timetable has been extended or qualified since. Someone needs to ring Bill!
Shorten's proposal is absolutely NOT either prudent of fair, Jarrod. What you and many others are missing is that most of the 660,000 affected took the advice of past governments to work and save for their retirement - a measure said to be good for them and good for the nation. Having done so, many now have incomes below pension level, but they are saving the government up to $50,000 a year in pension, concession and administration costs. Shorten intends to punish them by stripping them of thousands per annum, while rewarding those who did not follow this strategy but were happy to be dependant on taxpayers in their winter years.. This unfair deprivation will push many self-funded to reduce assets and resort to being pensioners. Additionally, the message to younger Australians is ''don't save unless you can accumulate very significant wealth, because pensioners are the new elite and savings above around $500,000 benefit ONLY the taxpayer unless you get well above the $1 million mark. SFRs with less than $1.6 million may not be paying tax, but they are making a major contribution to the budget - a contribution many will be prevented from continuing if Shorten's policy demolishes their lifestyle. Yes, there may be alternate investment strategies - but we should not have to become finance wizards in old age to achieve fair benefit from a lifetime of work, saving and paying tax.
This policy is NOT prudent or fair. What those who make this claim are missing is that most of 660,000 worst affected spent decades planning, working and saving for retirement in accordance with the law and in response to government urging to do so in order to reduce the cost of supporting aged pensioners. Their prudence and sacrifice is saving the nation up to $50,000 a year (per couple) in pension, concessions and admin costs, and many have less income than pensioners and no concessions. And they are now threatened with serious hurt by Shorten for making that significant contribution to the budget! Many will have no choice but to divest assets and claim the pension, resulting in a far greater cost to the taxpayer than the minor cost of allowing them a fair refund of overpaid tax on dividend income. Additionally, the strong message to younger Australians is ''pensioners are the new elite - and it's pointless saving more than about $300,000 each unless you can accrue a very large asset balance, or become a financial wizard in your old age (something the aged should NOT have to do!). All benefit of additional savings accrues to the taxpayer unless you are very wealthy, very lucky, or an investment guru - so far better to just spend up big or buy a big house and bludge on the taxpayer, even if you don't really need to. Clearly, a contribution of some $50,000 a year is much more than the small amount of tax millions who retain franking credits as a tax reduction pay, so why the grossly unfair persecution of people who did what they were urged to do for the benefit of the nation and now just want to be allowed to live in peace according to the rules under which they planned.
I am a late comer to this debate. I have an SMSF largely invested in shares paying franked dividends, and if the law is changed I believe I will do what Peter C. has done and close the SMSF and go for a large public super fund. Easily fixed. I will wait till I get the last dividends next year under the current system, and hopefully some recovery in the market. The main concern I have is the regressiveness of the whole idea, in that really rich people keep on getting their benefit in terms of a tax deduction, while the relatively poor, those lucky enough to have shares at all, lose a substantial benefit. From this the ALP will be spending billions on "schools and hospitals". For those who do not even make it above the tax free threshold, they will lose 3 times the GST rate on fully franked shares, a tax the ALP has already admitted is regressive, and won't support an increase on that basis. How is a tax foregone any different to a tax refund provided, to the revenue?
Fact - The Government does NOT cancel Franking Credits within a Company!!! How can it cancel an investor credits. At the very least the excess credits should be carried forward until the investor is deceased. To be used for taxation ie income tax and capital gain tax and death taxing.
An excellent, helpful piece Marcus, thank you. I am one of the retirees affected by the proposed changes, and you advice has a calming influence on my thinking. I have been thinking of rolling over my SMSF into an industry fund, but it would be an expensive move I think, and some of my shares (e.g.Telstra) are still paying great dividends wiithout the franking credits.
Hi, i dont trust Shorten & his union comrades. i am not aware of any that have run a business. The franking credit is not the govt`s money to take. If they go ahead with this plan the retired shareholder will pay tax twice. Once by the company paying the required tax, and twice by the retiree losing the franking. Investors dont need to be hurt anymore. RON, Narooma nsw
Very good article, thanks Marcus! I enjoyed reading people's comment and especially totally agree with comment by Ms LORRAINE COBCROFT. Marcus, I'm wondering though, when people say large super funds won't be impacted because they have members in accumulation phase that can use the credit to offset contribution tax, for those in SMSF, if you have your contribution phase children in the fund, would that solve the impact in the same way as the big funds? Can you please advise if this is workable? If there is no other strategies available, I suggest below: 1. if you are super rich, then ignore the impact, you can afford; 2. if you worked hard and spent less to save up your hard earned money, like myself, then spend more now and make yourself qualify for at least a partial aged pension so you can be exempt from the policy.