Franking credits scare is a 'storm in teacup' for self-managed funds says QUT law expert

THE much-voiced concern about Labor’s franking credits policy impacting on self-managed super funds policy is all smoke and no fire according to a QUT Law School Visiting Fellow.

However, he said people with shares in their own name – including many pensioners - could suffer a financial setback.

Alastair MacAdam, a former QUT law lecturer with a background in the legal profession and tax accountancy, claims those with self-managed superannuation funds don’t have to lose out at all. 

“For more than 30 years dividends paid to shareholders have had credits - franking credits or imputation credits - attached to them that are equal to the amount of company tax already paid on those dividends,” Mr MacAdam said.

“So if a shareholder pays tax, they can use the franking credit to reduce their tax, but if they pay no tax, then the franking credit is refundable as a cash payment from the government.

“Opposition Leader Bill Shorten has announced that if Labor is elected, they will continue to allow shareholders to reduce their tax with franking credits, but will stop giving cash refunds for excess credits," Mr MacAdam said. 

“There has been much debate and fear generated over this yet there is a way in which people can avoid losing out on the refund, at least so far as shares that are held in a self-managed super fund are concerned.

“Government and industry funds will not be affected by the proposed policy so individuals can simply switch to one of those funds but still effectively maintain their self-managed status.

“QSuper, for example, offers a ‘self-invest’ option and others do too. So you can capitalise on their knowledge but have your independence too, as well as choose where your shares go.

“If you don’t pay tax, or you are over 60, you can still direct that your parcel of shares be made up of companies with franked dividends. The catch is you have to select companies from the top 300 ASX but it is a genuine alternative to a self-managed fund and comes with franking credits," he said.

“So while Labor has said it will save $6 billion for the economy but they are being disingenuous; probably half of that is more realistic.”

Mr MacAdam said the people who will be most affected by the proposal are pensioners.

“Labor has said that anyone who was classified a pensioner in March 2018 will be exempt but everyone who becomes a pensioner after that will lose their imputation credits,” he said.

“There is all this talk about ‘the big end of town’ as if everyone with shares is a fat cat but in reality, lots of people inherit shares from family while others bought into the popular public floats by the Commonwealth Bank, AMP and Telstra over the past two decades.

“For many people who are on a full or close-to-full pension who have a small parcel of shares those franking credits are hugely important as a supplementary income.”

Mr MacAdam said people with self-managed super funds who do not pay tax can get around the proposal by selling shares held by their fund and transferring a lump sum into an industry or government fund that has the ‘self-invest’ option.

He said that for people whose fund was in the pension mode, there would be no capital gains tax payable on the sale of the shares as such funds are completely exempt from income tax.

“However, if you own shares outside of a super fund, you may be affected by this policy. You can sell them and put them into a fund but you will pay capital gains tax. Pensioners might be able to do this too but it will be a lot harder for them,” Mr MacAdam said.

“Of course the fact a policy has been announced doesn’t mean change will occur straight away. It could be years before we see actual legislation.

“It is also important that anyone in such a situation should seek independent financial advice.”