Expert SMSF insights

16 Nov, 2018

How Labor’s franking credit proposal hits the lower end of retirees

By Natasha Fenech, CEO SuperConcepts

Natasha-Fenech-CEO-SuperConcepts

The Australian Labor Party’s proposal to remove franking credit refunds is part of a suite of projected $55 billion savings earmarked for important services and infrastructure projects. The underpinning philosophy is that these savings will be provided by Australia’s wealthiest people who won’t miss it. But is that really the case?

The SuperConcepts technical team has done a detailed analysis and projection of the pension incomes hit hardest by Labor’s proposed policy.

Retirees with an account-based pension receiving a minimum pension amount of $45,000 per annum at age 65, will find themselves 15% worse off in retirement savings after 20 years. This is hardly the High Net Worth Individuals that an aspiring Labor Government suggested were the primary target of the projected Government revenue. Naturally this concerned us at SuperConcepts and the data we revealed formed a crucial pillar in our submission to the Inquiry on the issue with the Standing Committee on Economics.

The potential costs of Labor's franking credit policy to your retirement

Our analysis looked at the impact of removing refundable franking credits over 20 years on the superannuation balance of a member who at age 65 had an SMSF balance equivalent to the average SMSF balance for a member of that age (i.e. $900,000)1.

The calculations assume a 40 per cent allocation to Australian shares, 3 per cent capital growth and a 4 per cent income return. The calculations also assume the SMSF has a single member who only has a retirement phase interest in the fund and is receiving the minimum annual pension entitlement from an account-based pension.

  • Closing balance after 20 years with refundable franking credit: $953,480
  • Closing balance after 20 years without refundable franking credit: $825,519 

That’s a significant impact on the fund’s earning rate and the total income received each year. Breaking it down on an annual basis helps put the household budget in perspective.

  • Year one total income with franking credits: $36,771
  • Year one total income without franking credits $30,600 

That’s the cost of running a car and a modest annual holiday. From there it gets worse. After five years the income differential is $7,631 per annum and after 10 years the differential is $9,207 per annum.

The effect on the annual pension entitlement is just as worrying. After 10 years the SMSF member’s minimum annual pension entitlement would reduce from $60,756 to $56,762. After 20 years; from $88,298 to $76,991. This is due to the retirement phase benefit being replenished at a lower rate as pension payments are made, resulting in a quicker depletion of their superannuation assets.

Sure, trustees could increase their pension payments above the annual minimum requirement, but this would accelerate the depletion of their capital and increase their dependency on the age pension at an earlier age.

Labor's projected savings will not be realised

The introduction of the superannuation reforms on 1 July 2017 means that SMSF members with substantial balances are less likely to be impacted by the removal of refundable franking credits.

The $1.6 million transfer balance cap introduced on 1 July 2017 effectively limits the amount of franking credits which are refundable under the current regime.

SMSF members, who before 1 July 2017 had pension balances in excess of $1.6 million, were required to withdraw any excess pension balance above $1.6 million or transfer the excess balance to an accumulation interest in the fund.

As investment earnings from assets supporting an accumulation interest are taxable, the existence of an accumulation interest results in the fund having some taxable income to use its franking credits rather than those credits being refunded, which may have been the case prior to the 2017/18 income year.

This is an important point because it means SMSF members with a total superannuation balance in excess of the general transfer balance cap (currently $1.6 million) may not be impacted, or the impact from removing refundable franking credits, will be much less than first anticipated.

In other words, the projected budget savings of $55 billion over 10 years is unlikely to be realized. And much of the revenue that will be raised will come from the superannuation accounts of members with much smaller superannuation balances. Surely that’s not the intention of the workers party.

If this policy is well intentioned, the execution is misguided. A rethink in conjunction with the SMSF sector is in order to get the balance right. That, or a total abandonment of a muddled policy that hits the lower end of retirees.


1 ATO Self-managed super funds: a statistical overview 2015-2016.

 

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