Pop goes the SMSF Franking Credit Refunds … and we’re lucky

I made a call at my 2015 SMSF Strategy Roadshow across Australia that for SMSFs – this was as “Good as it was Gets”.   And how good was it.  Tax free income and lump sums post age 60, no income or capital gains tax on assets held by the SMSF Trustee for the purposes of paying a pension, a generous assets test for Centrelink aged pension purposes and of course, the tax bonus of the day, refundable imputation credits.

I knew in my heart and my head that things would change.  The constant bleat from Treasury on the size of tax concessions given to superannuation funds, and in particular SMSFs who have the greatest balances, were getting louder and louder.

Yet I did not expect a Coalition government, supposedly supportive of self-funded retirees, to make the first major incursion directed at SMSFs.  With the introduction, retrospectively of the $1.6M pension transfer balance we had brakes put on the tax-free pension component of a SMSF.  Although this did not necessarily mean more tax payable for a large majority of SMSFs in pension phase, laden with franking credits.  Simply a reduction in the amount of refunds they will be receiving.

What surprised me was the sheer acceptance by the Trustees of these funds of the changes.  For many with balances well over the $1.6M threshold the necessity of a wind back barely created a headline.  The government had managed to attack the quantum of refundable imputation credits in a sleight of hand way.

I remember discussing this issue with my fellow directors of the SMSF Members Association and clearly this was a line in the sand.  We had previously obtained from Prime Minister Tony Abbott a letter that SMSF taxation would not be changed while he was in government.  Of course that went out the door with new Prime Minister Turnbull and Treasurer Scott Morrison.  A line in the sand should have been drawn but do you think we could get any emotion, or concern from SMSF Trustees.  None, not at all just sheer acceptance of the government right to change their laws, impact their financial circumstances because they were at the high end of SMSF assets.

Bad, bad move.  You know the saying, you give an inch and they will take a mile!

So here we are with an opening gambit from the Labor Party Opposition to do away with refundable franking credits.  They will supposedly use this to fund tax benefits for low and middle income earners.  Now will these changes get up.  There is finally some movement, mainly at non-SMSF pensioners living off franking credits but I am sure the proposed concessions for low to middle income earners will keep them happy.  The ones who will be well and truly put out of pocket will be SMSFs.

So here is my advice prepare for the change.  Now it is only postulated policy at this time but the line has been drawn and with a potential $11Bn cost saving to spend it looks like they have found the egg from the Golden Goose.  So as SMSF advisers or Trustees we need to make plans for its implementation.  Whether it is now or in a few years’ time the cat is out of the bag and won’t go back in.  And do any of us trust Treasurer Morrison to not tweak it a bit and call it his own.  After all he started the SMSF tax grab.

One benefit of this policy is to get all SMSF clients that may be impacted by the change to a seminar to tell them of the changes, the downsides, the cost over the next five, ten and fifteen years and of course the strategies to counter the move.  I have covered those strategies in my book “The Guru’s Guide to SMSFs” and will be getting into them in great detail in my four day SMSF Strategists Intensive on 9 June 2018 where will pull apart all laws, including Morrisons pension transfer balance limits and the negative gearing plus abolition of refundable imputation credits of the Opposition.  If you are interested in attending, it is limited to 40 seats only and of course, four days with me will be intense, challenging and highly profitable.  Anyway contact us at support@Ilovesmsf.com for full details.  By the way the course meets RG146 requirements as a specialist SMSF advisers not a generalist.

My final word is why are we lucky?

Well we can plan and strategise our way around the pension transfer balance rules as well as the proposed loss of refundable imputation credits but expect more changes to come.  Lots more with 50% of SMSFs now in pension phase and growing, SMSF tax revenue will continue to come under fire.

Here are my parting words.  In a SMSF a Trustee does not get a tax deduction for that portion of the deduction that relates to pension assets.  If they did that with pension imputation credits we could be a lot worse off than the proposed denial of refundable imputation credits.