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Major SMSF firm flags strategies for franking credit policy

Major SMSF firm flags strategies for franking credit policy

Miranda Brownlee
16 April 2019 — 3 minute read

A major SMSF services provider has outlined some possible strategies for SMSFs to consider in response to Labor’s franking credit proposal, should the measure ever become legislation.

In an online article, SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley said that there are a few strategies which could reduce or mitigate the loss of franking credits, if Labor’s policy to remove refundable franking credits does become law.

Transferring investments to accumulation phase

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One option, Mr Colley explained, may be to shift investments into accumulation phase.

“Income on investments in accumulation phase is taxable and it may be possible to fully absorb any franking credits against the taxable income of the SMSF,” he said.

“Transferring investments from retirement to accumulation phase requires a full or partial commutation of a pension to allow the relevant investment to be recognised as part of the accumulation assets of the fund. To this end, the pension in question must be one that can be commuted back to accumulation.”

Making a concessional contribution

Similarly, clients could make concessional contributions to super and offset the franking credits against any tax paid on those contributions, he said.

“Contributions made by a member or their employer are taxed in the fund at 15 per cent. Subject to meeting the work test if you are 65 or older, it may be worthwhile to increase concessional contributions to the maximum cap, which is currently $25,000, to use any franking credits if the fund has no tax to pay,” Mr Colley explained.

Investments with lower or no franking

Mr Colley said that SMSFs may also decide to change to investments with a lower franked amount or that are not franked at all, but said that this should be considered very carefully.

“The reason is that any action needs to be considered from an investment point of view. This consideration should include a comparison of the franked investments versus other investments from a yield, capital gains and investment risk,” he said.

“If the proposed investment does provide a better overall rate of return within acceptable risk parameters, selling one or more investments held by the fund and purchasing the proposed investment may be justified.”

Withdrawing amounts from super

For individuals that are over 65 or have satisfied a full condition of release, Mr Colley said that having investments transferred from their SMSF to their name may allow them to use the franking credits attached to the investment.

“However, you will need to ensure you can use the credits effectively and not lose them if an excess results,” he cautioned.

“Before the decision is taken, the long-term tax impact of the decision should be considered, as the long-term after-tax investment return in your name may be less than what would have been achieved if the investment was owned by your fund.”

Add new members to the fund

Mr Colley said that another way of boosting fund contributions could be to add additional members, which will help offset franking credits against any tax paid on those contributions.

“If the new members are in accumulation phase and their superannuation benefits in other funds are rolled over, or concessional contributions are made to the fund, it may be possible to use any franking credits and reduce or eliminate the loss of any excess franking credits,” he said.

“Be careful [though], with a greater number of individuals involved with the running of the fund, without proper planning, it may lead to some unintended outcomes and consequences for existing members.”

Rethink optional deductions

While most funds like to maximise the tax deductions available, clients may want to rethink some of the deductions which are optional to the fund, he said.

“This applies to insurance premiums, but the type of insurance and the amount of the deduction for the premium depends on a number of issues,” he said.

“Whether a deduction for insurance premiums is claimed by the fund is up to the trustee. If the fund does not claim a tax deduction for the premium, the taxable income of the fund may be greater than if a deduction was claimed. This may allow the fund to use some of the excess franking credits against any tax payable by the fund.”

Mr Colley warned that any change in the fund’s investments or other strategies involving the fund should be carefully considered.

“We really need to wait to see the final form of any legislation as passed by the Parliament before trying to work out the most effective strategy,” he cautioned.

“Importantly, it’s the risk-adjusted after-tax return of the whole transaction and not just whether there is a more efficient use of franking credits that really matters.”

Major SMSF firm flags strategies for franking credit policy
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