Equity Strategy: Refundable franking credits and retirees

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
04 October 2018, 10:49 AM
Sectors Covered:
Resources, Metals

Stay informed and have your say

 

  • Labor's proposal to scrap cash refunds of surplus franking credits has created unwanted angst for affected retirees.
  • Public debate is intensifying as these retirees point out that this proposal adversely affects their long-term retirement planning. Retirement savings decisions have accounted for franking refunds as an established feature of our tax system, which are therefore core to the financial security of retirees.
  • We explain why Labor’s proposed changes to franking are not a given and why it is premature to alter investment strategies at this time. However it is important to stay informed about how potential changes may affect you. It’s also critical for retirees to have their say on the issue.

Labor's proposal

Effective 1 July 2019, Labor proposes to abolish the ability for individuals and superannuation funds to claim surplus franking credits in the form of cash, where refundable credits are greater than tax payable. The proposal most affects members on retirement pensions (0% tax environment) where franking credits would no longer provide cash "top-ups" to the pension account balance, hence reducing income returns.

Intense public debate

The issue is a dominant concern for SMSF members as it impacts Australian retirees budgeting for their financial futures. It is emotionally charged given the issue adversely effects a portion of the retiree base who can least afford it, and who have budgeted for their financial security based on a long-established tax regime, which Labor now wants to change.

What happens from here?

Sections of the financial press might have you believe that Labor's proposal is a given when it is not. For franking changes to be enacted, Labor needs to win the next election (with the policy intact) and then must successfully legislate it through Parliament, which may prove difficult. Labor has already watered down the proposal since it was first announced, and may do so again if it looks like costing too many votes.

What we do know with certainty is that political debate will intensify heading into the next election as the issue will affect votes. The Government has now announced a Parliamentary Inquiry into the proposal. The Standing Committee on Economics will examine the proposals' impacts, particularly on retirees who have made long-term retirement plans based on their ability to claim refundable credits and whether it will compromise their security.

Keep calm and stay informed

It is premature for retirees to alter their retirement plans or investment strategies based on an as yet unlegislated proposal. We would stress that any retirees considering the withdrawal of assets from the Super environment on the basis of this proposal should seek advice to avoid any adverse unintended consequences relating to CGT and other Super issues.

It is most prudent, however, to stay informed about potential changes and how they may affect you should we see a change in the style of Government.

Have your voice heard

We think that it's critical for retirees to have their concerns heard on this matter. Morgans is making a submission to the Parliamentary Inquiry (due 2 Nov) on our clients behalf. We urge clients to express their own views via either 1) making their own submission either online here or by emailing economics.reps@aph.gov.au; or 2) by contacting their local Members of Parliament.

A number of industry associations have also formed an alliance in response to Labor's proposal. Concerned clients can also take action via the Alliance for a Fairer Retirement System website - http://www.fairerretirement.com.au.

More information

Morgans clients can access the refundable franking credits report for the full briefing of facts, key knowns and unknowns relating to Labor's franking proposal. If you would like more information, please contact your adviser or nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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