7 May 2019
James Kirby – Wealth Editor
Some of Australia’s largest superannuation funds risk being caught out by Labor’s planned franking credit shake-up, despite claims they will be exempt from the $6 billion crackdown.
The changes mean super funds could find themselves in breach of tough superannuation rules that demand all members inside a fund are treated “equitably”.
Hundreds of thousands of retirees in funds who are in a pension phase are currently paid a “crediting rate”, which is designed to allow for the special tax status of pensioners who are entitled to franking credit refunds.
But the termination of franking credit refunds under Labor’s planned shake-up will mean funds will have to review how they pay members who are in the pension phase.
Just how any large super fund — including a retail fund — should distribute franking credits between retirees and non-retirees is now looming as a key issue.
“Everyone in the sector is currently trying to work this out,” said John Perri, a technical services manager at AMP.
If funds continue to pay retirees under the current arrangements, they could be allowing for a tax benefit that will no longer exist. This could upset members who have not retired but may find themselves cross-subsidising retired members.
The changes could put the funds in breach of rules to ensure all arrangements in super are “equitable”. But if funds reduce pension payments to adjust for the removal of franking credit refunds, retired members could be affected.
“There are a range of questions unanswered on the franking credits changes,” said John Maroney, chief executive of the SMSF Association. “It’s driving uncertainty across the sector.”
The developments came as Treasurer Josh Frydenberg yesterday claimed Labor’s franking credit plan is “starting to bite” in the polls. But in the treasurers debate in Canberra, shadow finance minister Chris Bowen said eliminating cash refunds to retirees who paid no tax was a matter of “fairness”.
Industry funds are generating fast-paced market share growth, partly on the widespread assumption their members will not be affected by franking credit changes. The Australian understands most big funds have decided to retain existing levels of payments to retirees even if the franking rules change. The bigger super funds have said they will not be affected by franking credit retiree refund changes because they have enough non-retired members who can benefit from franking credits (franking credits are not being scrapped, just franking credit refunds to retirees).
For example, the $140 billion AustralianSuper has more than two million members generating an income — that is in the accumulation phase — with just a couple of hundred thousand retirees on the accounts. AustralianSuper told its members: “The proposed changes are not likely to have a material impact on the investment returns in either retirement or super investment options.”
At face value, the claim stands up at the “fund level” — the funds get franking credits and then use them to benefit members. But different individual tax exposures and investment choices mean the full impact will not be known until draft legislation is passed.