For many Australian investors the tax offset features of franking credits have increased the incentive to invest in the stock market. For some retirees, the ability to earn additional income from their excess credits (a cash tax refund) has been an important consideration in their investment and retirement plans.
Self-managed super funds have been able to use their franking credits to offset some of their other tax liabilities whilst retirement (pension) funds have receive refunds from their franking credits.
If there is a change of government in May, the reforms proposed by Labor will unwind cash refunds for excess franking credits.
The policy will apply to individuals and superannuation funds, but not to some pensioners, registered charities and not for profit organisations. Interestingly, unions as registered charities will not be affected.
The greatest impact will be felt by older independent investors as they are most likely to receive cash refunds from franking credits. The chairperson of the SMSF Association estimates that the charges will cut around $500 of income from the median SMSF in retirement phase earning around $5000 per annum in pension income with a 40% allocation in Australian shares. Those retirees who are in receipt of a full or part age pension, or people who are on other government allowances may be exempt. Therefore, SMSF’s with at least one exempt person would also be exempt.