Fund manager calls for an alternative to Labor’s franking policy

Don Hamson

Leading income investment fund manager, Plato Investment Management Limited (Plato), has warned that the Australian Labor Party’s (ALP) proposed changes to Australia’s dividend imputation system may impact more superannuation funds and retirees than anticipated.

Plato Managing Director, Dr Don Hamson, believes that while honorable in its intent to cut costs and discourage abuse of the system, the ALP proposal may potentially impact a broader range of stakeholders.

“The ALP proposal will clearly impact many pension phase SMSFs, but Plato research suggests it has the potential to impact many other superannuation funds,” said Dr Hamson.

Data from the Australian Taxation Office (ATO) and analysis of statistics from the Australian Prudential Regulation Authority (APRA) backs up the Plato research, showing that many APRA-regulated funds are also likely to be affected, including potentially some industry and retail superannuation funds.

The impact of Labor’s proposal, therefore, may be broader than initially predicted.

“Any superannuation fund with a large percentage of pension phase investors may be receive a net refund of franking credits now.” Dr Hamson said.

“The likelihood and size of franking credit refunds is also related to the amount of franking generated (higher), the level of total taxable income (lower) and the level of contributions tax paid by accumulation members (lower).”

“When investment returns are low, reducing taxable income, a higher percentage of superannuation funds may miss out on some or all of their franking credits, exacerbating the low investment returns.”

“As the superannuation industry matures, and more members move to pension mode, we believe this proposal may represent a ticking time bomb for the whole superannuation industry.”

Call for an amended solution

Plato believes that the policy requirements amendment, either through the implementation of caps or other measures.

“Perhaps a better way to eliminate the few extremely large franking credit refunds would be either to limit the total amount people can invest into super, or limit the maximum franking credit refund per person,” Dr Hamson said.

Franking credits currently provide a very valuable increment to the income of all defined contribution retirees, as well as very low-income investors outside the superannuation system.

An investor’s ability to access franking credits will depend on their retirement investments and how they invest under the new ALP proposal. Members or their advisers should therefore ask ‘will my superannuation fund lose net franking credit refunds?’

Plato based its estimates of the typical impact of imputation assuming an average SMSF exposure to Australian shares based on March 2018 ATO statistics of 31%, and the franking credit yield of the S&P/ASX200 Index which has averaged approximately 1.5% pa over the 10 years to December 2017.

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