“The franking credits in the SMSF, which would otherwise be lost, can be used to cover contributions’ tax liabilities and income and capital gains tax liabilities on the members in accumulation phase.”
SMSFs can have up to six members.
SMSFs in the pension phase with no children would miss out on the refundable franking credits, Mr Thomas said.
Under a trans-Tasman government law, New Zealand companies listed on the Australian Securities Exchange pay franking credits in cash to Australian shareholders, not as dividend imputation credits.
If a Labor government allowed this to continue, investing in Kiwi dividend-paying stocks such as Chorus (formerly Telecom NZ), Meridian Energy, Mercury and Trade Me could become more attractive.
“There is a bunch of New Zealand companies that are listed on the ASX and pay out their franking credits in cash so that’s a portfolio reposition you could make,” Mr Thomas said.
The third option for investors currently enjoying the benefit of cash refunds for excess franking credits is to rebalance their portfolio towards higher cash dividends, rather than looking at franking credits.
Pitcher Partners client director Brad Twentyman said franking credit changes would provide an incentive for investors to consider alternative investment opportunities.
“We expect the outcome would be a shift out of Australian companies paying franked dividends and into real property and overseas investments,” Mr Twentyman said.
“Our expectation is that more wealthy investors will largely be able to mitigate and eliminate the tax cost to them of the franking credit changes by investing in alternative assets targeting unfranked income.
“However, for smaller investors the outcome of the franking credit changes is likely to be both a significant increase in compliance costs and increased tax on investments.”
‘Never a good look’
Some investment advisers believe it is too early too worry too much about Labor’s proposal.
Bennelong Private Wealth managing director Bill Raffle said there was a “lot of water to go under the bridge before this would become law and I really can’t see why that Labor would want to dig in its heels and alienate retirees in this way.”
“It is never a good look to change the rules on people who have retired on the basis of one set of rules and often no longer have the means to replenish their capital,” he said.
All of the 10 non-Green crossbench senators who hold the balance of power until June 30, and at least six who will continue from July 1, oppose Labor’s franking credit changes.
Labor shadow treasurer Chris Bowen has said the election result is not known and the make up of the Senate is uncertain. If Labor won the election, Mr Bowen has said it would claim a mandate to implement its tax changes.
Dividend imputation was introduced by then-Labor treasurer Paul Keating in 1987 to eradicate double taxation. It entitles a shareholder to a tax credit on a dividend which is equivalent to the tax already paid by a company.
The Howard government made the system more generous in 2000 so that if a shareholder had an imputation credit higher than their personal tax liability, the investor would receive the excess credit as a cash refund.
Australia is the only advanced economy with a fully refundable dividend imputation credit system and Labor wants to bring the system back in line with its original 1987 design.
Labor’s policy would raise an estimated $55.7 billion in revenue over a decade. Franking credits for company tax paid would still be available for shareholders to avoid double taxation.
After a backlash by investors and retirees in March, Mr Bowen softened the policy to protect more than 300,000 low-income full and part pensioners.