Be careful what you wish for

I wish? Handsome young man in full suit keeping fingers crossed and eyes closed while standing against grey background

All evidence so far would indicate the SMSF sector is in for the fight of its life during the term of the Albanese government, however long that might be. And the information I’m getting from some sources is there is a feeling in Canberra SMSFs have no friends in the corridors of power.

I think we’re all mature enough to know how this works. The Labor Party has to provide industry super with some reward seeing they provide a substantial amount of funding for ALP election campaigns and that reward is in the form of whacking SMSFs.

That’s all good and well, but the strategy can easily backfire if a broader perspective is not adopted by the powers that be.

There already is plenty of evidence superannuation policy under the current government has in no way been helpful to SMSFs.

Firstly, there is the proposed measure to impose an additional 15 per cent tax on people with a total super balance above $3 million. It has been widely acknowledged the predicted 80,000 individuals expected to be affected by this move will mostly be made up of SMSF members.

Next there is the draft legislation setting the parameters for the non-arm’s-length expenditure rules, in particular with regard to general expenses. The government has given a little ground on this issue with the final proposal being penalty tax charged at the highest marginal tax rate on two times, instead of five times, the expense shortfall between the commercial amount and the actual amount paid by the fund. However, large public offer funds, namely industry funds, will be exempt from these rules – a luxury not afforded to SMSFs or small Australian Prudential Regulation Authority- funds.

These aforementioned items have dominated sector discussion for the first half of 2023, but there is still another matter on the table that has garnered little debate but could end up being the most egregious policy proposal of all. I’m referring to the intention to make changes to the dividend imputation system.

The election campaign of 2019 saw the ALP propose the scrapping of franking credit refunds – a measure designed to penalise SMSFs that spectacularly backfired.

So this time around Labor is still looking to change the system, but has taken a more shrewd piecemeal approach.

To begin with it is attempting to reform the system by preventing the use of franked dividends for off-market share buybacks and to restrict their use when dividends are declared as a result of capital-raising activities.

The first prong of this two-pronged attack is not so serious, but the second has caused considerable angst among the investment community.

It is a well-known fact franked dividends make the domestic share market appealing to Australian investors. As such, limiting the availability of franking credits could just see individuals revising their portfolios and minimising their positions on the Australian Securities Exchange.

If the move to change the dividend imputation system is designed to penalise SMSFs, it will achieve this. But if individuals and organisations begin to move their money out of Australian equities, that will drive all share prices down, including those held by industry superannuation funds.

Should this happen it will definitely be an unintended consequence of this policy. So punishing SMSFs might be the aim of the exercise to placate the industry funds, but it comes with perhaps a more significant price.

If this is a wish the industry funds had before the election, then they should be careful what they wish for.


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