Refundable franking credit change hits retirees

Issues of fairness are raised as the proposal: 1) adversely impacts a portion of the retiree base that can least afford it; and 2) retrospectively alters a long-established feature of our tax system, which is core to the financial security of retirees. 

We think it is premature to alter your existing investment strategies. We think it's critical for members to stay informed and to have their voices heard on the issue. 

Effective July 1, 2019, Labor proposes to abolish the ability for individuals and superannuation funds to claim surplus franking credits in the form of cash. The proposal would most impact members on retirement pensions (0% tax environment) where franking credits would no longer provide cash 'top ups' to the pension account balance, hence reducing income returns. 

The issue is a dominant concern for SMSF members as it impacts retirees budgeting for their financial futures. Issues of fairness are raised given the issue adversely impacts a portion of the retiree base who can least afford it. Similarly, the retrospective change would impact those who have budgeted for their financial security by adhering to the rules of a long-established tax regime. Issues of logic are worth debate given that the change would likely see more retirees revert to relying on the government age pension, to the detriment of the economy. This contradicts the very aims of government support for self-funded superannuation considering Australia’s ageing population. 

Below are the hurdles which need to be cleared for the proposal to be enacted. Whether the issue looks like costing Labor votes at the upcoming federal election shapes as a key influence on how the proposal might change, or not. What we know with certainty is that political debate will intensify. 

We reiterate it is premature for retirees to change their retirement plans or investment strategies based on a maybe. It is prudent, however, to be aware of and prepare for, the implications of potential issues like these under a new style of government, if Labor wins the next election. 

There are however a number of hurdles that need clearing before the proposal is enacted. 

Given these hurdles, Labor may water down or abandon the proposal. If Labor fears a net loss of votes over the issue, then it may need to water down or abandon it altogether. Labor has already made carve outs on its original proposal. 

Labor may not win the election – Despite Labor being the clear favourite, recent history shows that polling and bookies are often wrong on politics (BREXIT, Trump). A lot can change before the next election.

Even if they did win, the proposal would still need to be legislated – Legislation of the proposal may be a difficult process depending on the composition of both houses of Parliament.

If legislated, the changes may not apply for some time – Even if legislated under Labor, the current intention is that the changes would only be introduced from June 2020 onwards.