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Compliance & Regulation, Investments

Franking credit proposal fails policy test

Labor's franking credit policy fails on certainty and fairness.

The Labor Party’s proposal to scrap franking credit refunds for some retirees fails the test of strong public policy on four grounds: adequacy, sustainability, certainty and fairness, a prominent retirement group has said.

Alliance for a Fairer Retirement System chair Professor Deborah Ralston noted the proposal would affect the incomes of more than 1 million Australians, of which 437,000 would be SMSF members.

“Unlike the foreshadowed changes to negative gearing, there is no grandfathering proposed to allow individuals to adjust their investment strategies over time,” Ralston said.

“This makes it especially harsh as many will be unaware of the impact of this proposal until it occurs. Under these changes, an SMSF or self-funded retiree with investments in Australian equities may find themselves worse off than if they had not saved for retirement.

“The alliance is deeply concerned not only by the negative economic impact that this proposed policy will have on more than 1 million Australians, but also by the psychological impact.

“We are also concerned that Labor is adopting a public policy that will drive people onto welfare, especially when they have made every effort to save for retirement and be fully self-funded in retirement.”

According to Ralston, an SMSF couple in pension phase with $1 million in savings and no age pension can expect an annual income of $60,000 a year, of which $42,000 is dividend income and $18,000 is a franking credit cash refund.

She pointed out without the franking credit cash refund, the SMSF’s income falls to $42,000, representing a 30 per cent drop.

“By contrast, a couple on a full age pension with $300,000 invested in Australian shares and in an APRA (Australian Prudential Regulation Authority)-regulated fund does not lose their franking credits and their income of $53,573 remains untouched, a situation the alliance regards as fundamentally inequitable.”

She also warned the policy will actively discourage Australians from investing in Australian businesses.

“There can be no doubt that SMSF investment in blue-chip Australian equities has been an important development in capital formation in this country and, as such, a policy that will ’encourage’ them to divest their holdings will have a significant impact on capital markets and capital management by Australian companies,” she concluded.

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