If you are a self-funded retiree with a self-managed super fund, chances are you are nervous about Labor’s policy to remove the refund of excess franking credits. But there is a way to keep all your franking credits.
You could switch partially or fully from an SMSF to an industry fund and set up an account-based pension. You would continue to get the franking credit benefit, which is worth 1% to 1.5%.
How does this work? While SMSFs and some retail funds are firmly in the firing line of Labor’s policy, industry funds have a different structure and most won’t lose any franking credits.
What this means is that the dilemma affects a certain sort of super fund but not others.
SMSFs have a small pool of assets and in the pension phase typically don’t have enough tax liabilities to offset any excess imputation credits.
But industry super funds do.
They typically pool their members’ savings, mixing the pre-retiree money with retiree money. For example, both types of members could be in the balanced investment option. Because the fund as an entity pays tax, individual members won’t be affected by the proposal.
An industry super fund lines up the tax liability with the franking credits at the end of the year and makes any adjustments for members. As long as there are enough tax liabilities to absorb the franking credits, none are lost.
Take AustralianSuper, Australia’s biggest fund with more than $140 billion of retirement savings from more than 2.2 million members from around 280,000 employers.
It won’t be affected by Labor’s changes and its members will continue to receive the franking credits. This is the same for many other industry funds.
The large amount of assets are pooled and the fund, rather than the individuals, pays tax.
Quite a few super funds – such as AustralianSuper, QSuper, CareSuper, Hostplus, Media Super and Cbus – offer direct investments, including the top 300 listed Australian shares, dozens of exchange traded funds and term deposits.
These investments are similar to many that are used by SMSFs. Often they have loaded up their exposure to high-dividend-paying Australian shares to receive an income (including franking credits).
There is some debate as to whether the member-direct options are free from Labor’s proposal to remove excess franking credits, with some industry funds saying the full impact won’t be clear until more details emerge of how the policy will be applied.
But there is a chance that even these options are part of the overall fund and won’t lose their franking credits.
Of course, everyone has different circumstances, particularly when it comes to tax, and you need to seek advice before you move from an SMSF to an industry fund.