‘Targeted approach’ of franking credit policy to limit SMSF impact
While Labor’s franking credit changes will have an impact on SMSF investors, it will be nowhere near the extent of its previous 2019 policy, says a technical expert.
In mid-September, the government released exposure draft legislation which would amend taxation law to prevent certain distributions that funded by capital raisings from being frankable.
The amendments will prevent companies from attaching franking credits to distributions to shareholders made outside or additional to the company’s normal divided cycle where they are funded by capital raising activities that will result in the issue of new equity interests.
The measure was first announced as part of the 2016–17 Mid-Year Economic and Fiscal Outlook.
Speaking in a recent podcast, Smarter SMSF chief executive Aaron Dunn noted that this is a very targeted approach compared with Labor’s previous policy announced in the lead up to the 2019 election.
“It’s a very targeted approach whereby companies won’t be allowed to pass through a fully franked dividend where it has been linked to a capital raising process,” explained Mr Dunn.
“So, if we take Westpac, for example, that’s one company that has gone through a capital raising process this year and NAB as well, but then they ended up doing a buy-back which had a very large component of franking credits.
Mr Dunn said this means that while the policy will have a limited scope, considering the types of companies and particular institutions that use this type of mechanism, the key benefactors have been SMSFs, charitable institutions and those sorts of investors.
“So, it is going to have an impact on SMSFs but nowhere to the extent of [Labor’s] previous policy,” he stated.
“We’ll have to wait and see how successful Labor are at getting this through.”
Wilson Asset Management chair Geoff Wilson has been vocal in his criticism of the proposed changes, stating that it appears to “inadvertently impact” situations of legitimate company operations and could accordingly “delay or discourage” the normal processes of capital raising, investment and economic growth in Australia.
“The legislation does not sufficiently distinguish between acceptable activities and the tax avoidance situations it intends to address,” Mr Wilson said.
The government has also outlined that it intends to backdate the integrity measure to coincide with the 2016–17 mid-year economic and fiscal outlook to ensure that only distributions equivalent to realised profits can be franked.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
