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Will your pension income drop under this new proposed legislation?

Jan 8, 2019, 10:03 AM

By Natasha Fenech, CEO SuperConcepts


The proposed removal of refundable franking credits will drastically affect the pension incomes of many people with self-managed super funds, according to data analysis by the SuperConcepts technical team.

Faced with the prospect of less income, many retirees will either need to divest some of their assets to qualify for the age pension and refundable franking credits or adjust their investment strategies by reducing their exposure to Australian equities.

Our analysis shows that self-funded retirees with assets marginally above the asset test thresholds are likely to respond by reducing their assets to qualify for a part age pension and a full refund of franking credits.

Naturally, the Government’s medium and long term fiscal position would be adversely impacted as more retirees qualify and start receiving the age pension.

And the proposed pensioner guarantee is likely to exacerbate this situation as more retirees with investment assets just above the asset test threshold will receive less income then retirees with investment assets just below the threshold. There is a clear incentive here for a larger cohort of retirees to divest to ensure they aren’t worse off?

Other self-funded retirees, including a large cohort of SMSF members are likely to adjust their investment strategies by reducing their exposure to Australian equities.

Why do shareholders get franking credits?

Franking credits were originally introduced to eliminate the double taxation of company profits, once at the corporate level and again on the distribution of those profits as dividends to shareholders.

Franking credits, and the availability of refundable franking credits, offers investors a risk premium for exposing capital to potential investment loss, making share ownership more attractive to investors.

If this risk premium is removed or reduced, it stands to reason investors will reduce their exposure to Australian shares.

Obviously, this wouldn’t be the preferred option for many Australians, but self-preservation will likely outweigh all else. It’s worth noting that at 30 June 2018, SMSFs had over $229 billion invested in listed equities and this asset class represented over 30 percent of total SMSF assets1.

Franking credit refunds help fund Australia’s capital investment 

A reduced demand for Australian equities relative to other investment classes will make it more difficult for companies to raise share capital. That makes for a smaller Australian equity market, which means that Australian companies wanting to raise capital may be forced to increase their level of debt. And a higher cost of finance tends to reduce employment opportunities.

From there, it’s easy to see a downward spiral; a reduced amount of capital available for reinvestment, further reduces employment opportunities, and constrains economic growth.

Our June 2018 SMSF Investment Patterns Survey sampled 2,600 SMSFs administered by SuperConcepts, representing $3.2 billion in assets. Australian Equities represented 36.6 per of asset allocations2.  

Furthermore, the top 10 shares represented 12 per cent of total SMSF assets held, or just under 33 per cent of all Australian equity holdings. The most commonly held Australian shares at 30 June 2018, in terms of the total amount invested, are listed below:

Ranking  Investment 
 1   Westpac Banking Corporation 
 2  Commonwealth Bank Ltd 
 3 BHP Billiton Ltd 
 4 ANZ Ltd 
 5 National Australia Bank Ltd 
 6 CSL Ltd 
 7 Wesfarmers Ltd 
 8 Telstra Corporation Ltd 
 9 Macquarie Group Ltd 
 10 Woolworths Ltd 

Source: SuperConcepts’ June 2018 Investment Patterns Survey

This clearly illustrates a strong appetite for Australian equities paying high-yielding fully franked dividends. And for most retirees it is a critical cash flow that pays ongoing living expenses.

ATO statistics show 47 per cent of all SMSFs (i.e. 280,000 funds) as at 30 June 2016 were making pension payments to some of or all fund members3

ATO statistics also show that as at 30 June 2017, 83 per cent of SMSF members (approximately 900,000 SMSF members) were 45 years or older and 33 per cent of SMSF members were over age 654

Franking credit refunds affect the future economic viability of Australian companies 

For SMSFs paying a retirement phase income stream to members, having access to a reliable source of cash flow – like a fully franked dividend - is a critical component of the fund’s investment strategy.
If refundable franking credits are removed, SMSF members are likely to change their investment strategy by moving their holdings of Australian equities to other types of investments such as overseas shares, direct property, investment trusts and managed funds. 

Cue that downward spiral we outlined above: a reduced demand for Australian equities constrains access to capital for local companies, leads to higher debt due to the higher cost of finance, and affects employment.
In countries where no refundable franking credits exists the allocation of equities to debt and infrastructure is the opposite of the Australian superannuation industry’s asset allocation5.

In simple terms a 10 per cent reduction in Australian equity exposure would remove approximately $240 billion from the Australian share market or roughly 16 per cent of the overall market value. This would be unchartered waters for how Australian companies would replace this level of funding. And if they find they can’t, then the impact on their economic viability would also be a new ponderance for local companies. One they could do without, no doubt.

Is the Pensioner Guarantee a protection if franking credit refund is removed?

The proposed pensioner guarantee does little to protect SMSF members from the impact of removing refundable franking credits.

The guarantee will apply only to an SMSF if one or more members of the fund were receiving a Centrelink pension before 28 March 2018.

This ‘at a point of time’ approach means an SMSF that didn’t qualify for the pensioner guarantee on 28 March 2018 but has members who qualify for a Centrelink pension sometime on or after 28 March 2018, will still not be eligible for a refund of excess franking credits.

To rub salt in the wound, this same person would be entitled to receive a refund of excess franking credits if they had an alternative retirement savings vehicle.

The same applies to new SMSFs established on or after 28 March 2018. These funds will not be entitled to the pensioner guarantee and will be denied access to refundable franking credits regardless of the assets of their members and their entitlement to Centrelink benefits. 

Removing franking credit refunds hurts SMSFs 

For many prospective SMSF investors, this is likely to be a significant factor when weighing up the merits of an SMSF.

SMSFs have a legitimate claim to be part of the superannuation system as they represent those who are fully engaged with their retirement savings. Not only do SMSFs play a valuable role in allowing individuals the choice to exert more control over their retirement savings, they also provide a more competitive dynamic in the superannuation sector. 

We don’t believe it’s appropriate for Government to introduce a tax policy which reduces choice in the superannuation sector by favouring some superannuation segments over others - and which penalises individuals who decide to manage their own retirement savings.

The proposed policy to remove refundable franking credits is a key platform for the Australian Labor Party to fund $50+ billion in election promises. is currently subject to an inquiry by the Standing Committee on Economics, which has received a detailed submission by SuperConcepts.

We will continue to fight for SMSF members and urge people to participate in this survey and provide insight on how this proposal will affect you and your retirement plans.

A version of this blog first appeared at Accountants Daily.


ATO Self-managed super fund quarterly statistical report – June 2018.
SuperConcepts June 2018 Investment Patterns Survey. All funds included in the sample are administered by SuperConcepts and are administered on a daily basis. 
ATO Self-managed super funds: A statistical overview 2015-2016.  
ATO Self-managed super funds: A statistical overview 2015-2016. 
Global Pension Assets Study 2017, Willis Towers Watson.