Labor’s tax plan hits SMSFs hard, has major knock-on effects
Labor’s proposal for imputation credits “unfairly targets” the SMSF sector and will lead to unforeseen consequences including significant shifts in investment strategies, according to various groups in the super industry.
Labor this week announced a proposal to remove cash refunds for excess dividend imputation credits, as a way of “improving the budget bottom line”.
In a public statement, Bill Shorten said that Australia’s dividend imputation system was introduced by Paul Keating to eliminate double taxation on dividends from company profits.
“Under this system, shareholders can use imputation credits to reduce their overall tax liability,” he said.
“Under Howard and Costello, a concession was created allowing some individuals and superannuation funds to receive a cash refund from the ATO if their imputation credits exceeded the tax they owed.”
Mr Shorten said that the Labor government will seek to close down the concession created by Howard and Costello, and return to the arrangement first introduced by Hawke and Keating – so that imputation credits can be used to reduce tax, but not for cash refunds.
The proposed policy has been largely criticised by the superannuation and wider financial services industry, with a number of groups expressing concern it will erode retirement savings and impact millions of Australians.
The Self-managed Independent Superannuation Funds Association (SISFA) said the policy “fails the test of fairness” as it will benefit taxpayers on higher incomes at the expense of those on lower incomes.
SISFA managing director Michael Lorimer said that under this proposal, taxpayers with an effective average tax rate of 30 per cent or over will receive the full benefit of franking credits while those on lower incomes will lose out.
“Mr Shorten is meddling with the successful concept of imputation – that when company dividends are paid, they are taxed at the individual’s tax rate with full credit for the tax already paid by the company,” said Mr Lorimer.
“Under Labor’s plan, anyone in retirement and living on their superannuation savings will now have every dollar of their income from dividends taxed at a rate of at least 30 per cent.”
Mr Lorimer said while Bill Shorten says his plan to deny dividend tax refunds to super savers will mainly hit self-managed funds, in reality it will hit millions of members of the large industry and retail funds as well.
Tax Institute Senior Tax Counsel Professor Bob Deutsch described the policy as a “low hanging fruit” for Labor as it will require minimum legislative change, generate around $11 billion over the 2018-19 forward estimates and cause relatively minimal damage to Labor’s constituency.
“It will, however, cause some ructions in equity markets where tax refunds of excess imputation credits have been an important part of the investment matrix for equity investors, particularly self-managed superannuation funds,” said Mr Deutsch.
The SMSF Association estimates that this proposal would impact more than 1 million Australians saving for retirement and other purposes.
SMSF Association chief executive John Maroney said based on calculation by the association, removing the cash refund for imputation credits would cut about $5,000 in income from the median SMSF retiree earning about $50,000 a year in pension income.
“To be saying these people won’t be paying any more tax is just semantics,” said Mr Maroney.
“This change would single out SMSF members as one of the few groups of taxpayers who will have the profits of companies they own taxed higher than their marginal tax rate. Instead SMSF members in retirement phase will have company tax paid on their share of a company’s profits when none should be paid at all.”
Mr Maroney said the current system should remain as it removes double taxation of corporate profits, promotes corporate discipline in capital management and encourages corporate compliance with tax obligations.
It is also likely to have “unforeseen consequences” such as a shift in superannuation fund investment strategies, he said.
“Funds seeking yield to deliver retirement income, especially SMSFs which are paying income streams, would need to shift their asset allocation towards investments which can provide increased yield. This may lead to funds having to shift to a higher risk asset allocation in the retirement phase,” he said.
“Another possible outcome is SMSFs looking to shift investment from Australian companies to foreign companies with the after-tax return on domestic companies less attractive.”
JBWere technical services manager Kym Bailey said this latest policy position is a reflection of the “unofficial war that industry funds declared on SMSFs a number of years ago which now has a fully receptive political sponsor”.
Ms Bailey said the SMSF industry should pay attention to the Opposition’s policy as there is “an equal chance that it will become government policy in the future”.
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 has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.