Investment Strategy

SMSFs will abandon Aussie equities if proposed franking credit changes pass: survey

By Michelle Bowes
Insights Editor Sydney, Australia

SMSF trustees plan to switch out of Australian shares in favour of international ones should Labor win the upcoming election and implement plans to cut franking credits.

A survey of 632 SMSF trustees revealed that more than 72 per cent of respondents said they would change their investment strategy to compensate for the loss of franking credit income.

International shares were the most popular alternative, with 62 per cent of respondents saying that their share portfolio will shift to foreign markets, the SuperConcepts survey revealed.

“This is a big concern for the Australian Stock Exchange, a big concern for local companies contemplating the cost of capital from overseas sources, and a big concern for the future ownership of local firms if it’s no longer viable for locals to invest,” said SuperConcepts CEO Natasha Fenech.

Other investment alternatives

Managed funds, term deposits, fixed interest and property were also listed as potential alternatives to Australian shares by 25 to 27 per cent of respondents.

Three per cent of respondents were unsure of what action they would take, but most viewed the proposal as something that would impact them negatively, while 15 per cent said they would consider shutting down their SMSF completely.

When asked about the impact they believed the proposed change would have on their SMSF, 67 per cent believed it would impact them a great deal, 20 per cent said the impact would be significant, nine per cent believed it would be moderate and just 4 per cent believe it will have little or no effect at all.

The history of franking credits

Franking credits were introduced in 1987 to address the issue of double taxation on dividend income. They allow Australian investors to claim a credit for their share of the tax an Australian company has already paid on its corporate earnings and use that credit to offset their tax bill.

In the early 2000s, franking credits became fully refundable as part of changes to the dividend imputation system. This meant that investors who pay low tax (such as low-income individuals, charities and superannuation funds) could receive a cash payment from the tax office in circumstances where the credits actually exceeded their tax liabilities.

Franked dividends are extremely valuable to retirees. Retirees with a 0% tax rate on the assets in their account-based pensions receive an uplift of up to 43% on the cash value of franked dividends. By contrast, if a retiree receives $1 of capital gains or unfranked dividends, it will only be worth $1 to them.

The proposed changes

But a future Labor Government might allow franking credits to be offset only against existing tax liabilities, stopping low-tax investors from receiving cash payments when their franking credits exceed their tax liabilities. This would be somewhat like the rules in place pre-2000.

A future Labor Government proposes to exempt people who receive a Government pension or allowance, and self-managed superannuation funds which, before 28th March 2018 had a member on a Government pension or allowance, would also be exempt.

That leaves two main groups who would be affected. The first are individual shareholders, outside the social security system, with a small portfolio of Australian shares and limited sources of other taxable income.

The second group are members of superannuation funds where the fund either has limited amounts of concessional contributions, has a high exposure to Australian shares, has losses or limited sources of other taxable income, or has a large proportion of members in pension mode.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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