• Proposed cut to franking refunds will hurt Australian equity investors

On 13 March 2018, the Labor Federal Opposition announced its policy to deny from 1 July 2019 tax refunds for franking credits to approximately 1.2m or 8% of taxpayers and one third of all Self-Managed Superannuation Funds.

To do this, Labor must win Government at the next Federal Election, due to be called by 18 May 2019.

This policy will impact a number of self-funded retirees by reducing their income and increasing their entitlement to the aged pension, thus increasing the burden on the public pension system.

This policy could also potentially reduce the income of superannuation funds overall, but more specifically SMSFs because SMSFs tend to invest proportionately more in high yielding Australian equities and have less ability to offset excess franking credits against other income compared to large pooled retail or industry funds. This impact may discourage Australians from using SMSFs.

This policy may also make it less attractive for Australians to invest in Australian equities compared to other investments such as overseas equities, fixed income or property investments.

The combined effect of this policy with other Labor announcements to curtail income splitting through trusts, negative gearing and CGT discounts, would represent a substantially increased tax burden on a number of Australian investors.

If you or your SMSF currently receive tax refunds from franked distributions, please contact your Grant Thornton advisor to discuss potential action to appropriately plan for this issue.