Michael Hallinan

Mr Shorten’s proposal announced this week that cash refunds of excess franking credits should be scrapped will have a greater proportionate adverse impact on a retiree with a $500,000 balance than a retiree with a $5m balance.

If implemented, a retiree with only $500,000 in super will not be entitled to any franking credits (as the retiree will have no tax liability as they are entirely in pension phase): 100% reduction in franking credits.

However, a retiree with $5,000,000 balancewith $1.6m in pension phase and $3.4m in accumulation phase will have only a 32% reduction in franking credits.

If the retiree had a $10,000,000 balance with $1.6m in pension phase and $8.4m in accumulation phase, the proportionate reduction will be 16%.

If the retiree had a $100m balance with $1.6m in pension phase and $98.4 million in accumulation phase, the reduction would be 1.6%.

Cash refunds of excess franking credits are not a tax loophole – but a design consequence of the imputation system.

The imputation system effectively treats company tax as a repayment of the tax incurred by the underlying investing shareholder. Having excess franking credits simply means the investor has, by way of prepayment, paid too much tax.

By Michael Hallinan, Special Counsel Superannuation

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