There is no sure-fire way to get around the impact of Labor’s plan to abolish refunds on excess franking credits but there are a number of options that may provide an advantage in different to circumstances, a leading self-managed super technical specialist says.
Those options include transferring investments from retirement to accumulation phase, making concessional contributions to an SMSF, changing the fund’s investment strategy, taking money out of super altogether, and adding new members to an SMSF.
Graeme Colley, executive manager SMSF technical and private wealth, SuperConcepts, says: “The strategy that is best for an individual and their SMSF depends on the goals and objectives of the SMSF as well as the circumstances of fund members. In some cases, retaining shares with franking credits attached may prove to be the most appropriate investment.”
Colley recommends that all SMSF trustees should adopt a wait and see approach. First Labor has to get elected and then it has to get its legislation passed. And even if things get to that points the final form of the rules could be different from what is being proposed today.
Transfer investments from retirement to accumulation phase. Assets in accumulation phase are not affected by Labor’s proposal. Income from investments in accumulation phase is taxable and it may be possible to fully absorb any franking credits against the taxable income of the SMSF.
“Transferring investments from retirement to accumulation phase requires a full or partial commutation of a pension to allow the relevant investments to be recognised as part of the accumulation assets of the fund. To this end, the pension must be one that can be commuted back to accumulation,” Colley says.
Whether this strategy would provide any advantage is a moot point, as the fund was tax-free in retirement phase prior to transferring to accumulation phase.
One advantage is that in accumulation phase there is no requirement to take a minimum pension each year. Instead, the member could draw lump sums when required for living expenses. For anyone over age 60 the lump sums would be tax free.
Make concessional contributions to the SMSF. Concessional contributions made by a member or their employer are taxed at 15 per cent. The franking credits could offset any tax paid on the contributions.
Colley says: “Subject to meeting the work test if the member is 65 or older, it may be worthwhile to increase concessional contributions to a maximum cap, which is currently $25,000.”
Make investments that have low or no franking. Colley says this consideration should include a comparison of the franked investments versus other investments, from the point of view of yield, capital gains and investment risk.
“If the proposed investment does provide a better overall rate of return within acceptable risk parameters, selling one or more investments held by the fund and purchasing the proposed investment may be justified.”
Withdraw an amount from super an invest it in your own name. Colley says anyone who has satisfied a condition of release can transfer SMSF investments to their own name, which may allow them to use franking credits.
“The long-term tax impact of the decision should be considered, as the after-tax return in your own name may be less than what would have been achieved if the investment was owned by the fund.”
The tax rate in a super fund is 15 per cent in accumulation and zero in pension phase. Outside super, the tax-free threshold is $18,200 or more where the seniors and pensioners tax offset applies. The minimum income tax rate above that threshold is 19 per cent plus the Medicare levy.
Assets taken out of super may also be subject to capitl gains tax. The SMSF could be liable for CGT on the transfer of assets to an individual.
Add new members to the fund. By adding other members you boost fund contributions, and franking credits can be offset against any tax paid on those contributions.
Be careful. With a greater number of individuals involved in the running of the fund, without proper planning it may lead to some unintended consequences.”
Colley recommends that before taking any action SMSF trustees need to wait an see the final form of any legislation.