This is not about what franking credits are but you might want to look them up in detail if you are Australian and invest in Australian shares.
This blog is about the Australian Labor Party (Labor) plan to not let Self Managed Super Funds (SMSFs) claim franking credit “cash payments” for some but not all SMSF pension accounts. This policy is directed towards people who are not getting welfare from various governments in Australia.
You can be a pensioner with an SMSF and still be able to get the franking credit cash payment. You can have an SMSF accumulation account that receives the franking credit cash payment as these accounts do pay 15% tax. What is the difference between an SMSF pension account and a SMSF accumulation account? The former does not pay any tax and that was introduced by the government of the day to try to get more people off the aged pension but that is a macroeconomic story for another day. Governments have struggled with this concept and as a result, they keep changing the goal posts with superannuation.
Labor is going to the next election with four policies that are directly targeting what they consider the wealthier part of town. Labor is so confident of winning the next election, they are offering policies that would not be considered in a normal election. The current federal government is so dysfunctional in its ranks that many people are disillusioned by them and are looking for better leadership. Interestingly, Labor went through a similar time just before they lost power.
Chris Bowen is currently the shadow treasurer and will become treasurer if Labor wins. Last year, he said: “… some SMSFs receive cash refunds of more than $2.5 million a year (presumably in the context of pension accounts)”. Let’s consider how a SMSF pension could get a $2.5 million cash refund. The ASX 20 pays about 4.71% in dividends. An investment of $123,850,000 (yes, nearly $124 million) would get $2.5 million in franking credits.
Stats were rolled out from the Parliamentary Budget Office that supported his claim. 71.85 of SMSFs had balances over $1,974,000. This cohort claimed $1,366.2 million in franking credit cash refunds. Most interesting is that these stats are from 2014 to 2016. A lot has happened since then.
The latest ATO SMSF statistics (18 Sep 2018) can provide an estimate that 68.5% of SMSFs (roughly 750,000 members) have balances at or over $1.6 million. That is not a real change since 2016 but a lower figure is used. This appears to support claims that SMSFs are mostly “rich” people.
But why is $1.6 million mentioned in the second stats?
That figure is the balance transfer cap which means that SMSF pension accounts (tax free) can have a maximum balance of $1.6 million. Excess funds must be taken as a lump sum or moved into an accumulation fund which pays 15% tax. In other words, there are no SMSF pension accounts that can claim anything like $2.5 million in franking credit cash refunds.
Based on 2016 figures, around 50% of the SMSF assets were in pension mode which equates to around 375,000 members with $1.6 million. That figure is bound to change based on the balance transfer cap introduced in 2017 which forced major changes in asset allocations so account based pension numbers would be smaller.
Based on SMSF statistics, listed shares account for 30.8% of SMSF assets. That means an SMSF account based pension with $1.6 million could have $492,800 worth of shares. Dividends at 4.71% would pay $23,211. The franking credit cash refund to an SMSF currently would be $9,947.52.
In the unlikely event that all the $1.6 million was invested in the ASX 20, the franking credit cash refund would be $32,300.
Bowen claims stopping SMSF pension accounts from getting the cash refund will save the budget $11.4 billion over the forward estimates from 2018-19.
If 375,000 ($1.6 million in pension account, with 50% of all SMSF funds in pension account, investing average 30.8% in shares) accounts get $9,947.52, that equates to $3.73 billion.
If all 375,000 accounts invested all their funds, that would equate to $12.11 billion or close to the suggestion of $11 billion).
I am not an accountant so I don’t have any authority with what I am suggesting.
If a SMSF member has $4.8 million (three times $1.6 million) in funds, I don’t think that the SMSF can segregate certain assets into certain parts of the SMSF. Eg, I doubt that $1.6 million cash assets could go into the pension account and the rest ($1.6 million cash and $1.6 million shares) could go into the accumulation fund.
In my circumstance, my accumulation account has a set amount of the fund in it. It is purely an accounting figure. My accumulation fund is made up of cash and shares as a percentage of my total SMSFs assets. In other words, as an example, it does not contain x amount of RIO shares when my pension account holds no RIO shares.
So if I had one account based pension with $1.6 million and one accumulation account with $3.2 million, the account based pension would have one third of the total SMSF assets. If the SMSF assets were made up of $1.6 million shares and $3.2 million in cash, the account based pension would have $1.067 million in cash and $533,333 in shares with $10,765 in franking credits. The other assets would be in the accumulation account getting taxed at 15%.
Labor would not be keeping $32,295 in franking credits as one might think by what they say.
I know the numbers become a blur after a while but it just goes to show that there is something wrong with Labor’s forward estimates of not paying out $11 billion which remains in the government coffers.
The 2016-17 median amount of SMSFs is only $693,265. The mean is $1,223,460. Lets use the median amount as it has a better representation of the real numbers and it not skewed by the the richer end of the spectrum. If half of those numbers (the remaining being in accumulation funds) invested 30.8% of that median amount, the median amount of franking credit cash refund is only $4,310. The total amount of franking credit cash refund is only $4.8 billion.
At the bottom of all this money is that 363,741 SMSF members have less than $1.6 million. These are the people who likely have under $700k in accounts because of the skewed data from the wealthy end so perhaps $450,000 might be more reasonable for this cohort. With 50% being in accumulation mode, that leaves around 182,000 members in pension account mode. These people would lose about $510 million ($2,800 each) in cash payments as they can’t fiddle with the accounts like the richer people.
All these numbers do not take into account that pensioners with an SMSF won’t be losing their franking credit cash refunds. They will be keeping a very close eye on how much they have as the government will be applying deeming calculations to the amount the pensioners have in financial assets. Deeming rates are 3.25% which is lower than the stock markets average dividends so they can have more franking credit cash refunds than a normal tax payer.
Given that the balance transfer cap in now part of the superannuation landscape, I cannot see how Labor thinks that it can get $11 billion a year out of franking credit cash refunds. If anything, the smaller end of town will be the SMSF members hit the hardest. Labor will be taking money from the average citizen to give to the poor in wider welfare handouts while the rich can still diddle their finances.