Franking credits and the uplift in income they deliver are crucial for every retiree’s investment strategy. The income benefits of franking credits are an intrinsic part of the strategy that many investors adopt to attain their retirement goals.
These benefits will be impacted if limitations proposed by the Federal opposition on access to franking credits refunds for some individuals and superannuation funds go ahead. Furthermore, the impact will extend to investment decisions with a need to adjust portfolios if changes to the franking system are implemented.
Proposed changes by Labor
A future Labor Government has pledged to only allow franking credits to be offset against existing tax liabilities, stopping low-tax investors from receiving cash payments when their franking credits exceed their tax liabilities. Exemptions include the Future Fund, charitable and religious organisations, people who receive a Government pension or allowance, and self-managed superannuation funds which, before 28th March 2018 had a member on a Government pension or allowance.
That leaves two main groups who would be affected. The first are individual shareholders, outside the social security system, with a small portfolio of Australian shares and limited sources of other taxable income.
The second group are members of superannuation funds where the fund either has limited amounts of concessional contributions, has a high exposure to Australian shares, has losses or limited sources of other taxable income, or has a large proportion of members in pension mode.
In other words, a large number of SMSFs are likely to feel the proposed changes.
How should retirees respond?
Considering the implications of the proposed changes, here are a few things to consider:
- Review saving strategies or retirement goals – this will involve understanding the impact based on individual circumstances and could include accepting the reality of reduced income in retirement, for people still in the workforce it may mean working for longer, or for those already retired it may mean adjusting spending goals.
- Review where assets are invested – this mainly applies to people with an SMSF fully in pension phase who may consider moving their Australian shares or all of their portfolio to an APRA regulated fund such as an industry fund. However, careful consideration would be required as it would become more difficult to manage drawdowns from multiple funds and the circumstances of the chosen fund may also change to the point where they also lose the benefits of the franking credits.
- Revise investment strategy – the most likely course of action for most will be an adjustment to their investment strategy. Australian investors, particularly SMSFs, are often criticised for having a home country bias towards Australian equities as a result of the value of the franking credits in boosting the returns. Likely alternatives include a shift towards international equities, listed property trusts, infrastructure assets, commercial property, or other alternative investments. However, all options should be considered with a view to managing risk and it does not negate the need to have an allocation to Australian shares in a well-balanced portfolio.
However, at this stage, we’re jumping the gun. Labor needs to be elected, and then it must obtain Senate support for its proposal, and already, the cross-benches are indicating a lack of support. It is premature to take action now, although for retirees it is worth knowing the alternatives to ensure they remain on track to attain their personal income goals.
The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.