The recent announcement from the Labor Party that it plans to abolish the refunding of franking credits has caused much concern amongst Elston clients. This measure, aimed squarely at self funded retirees, is the latest in a string of attacks retirees have had to cope with. That it comes off the back of a significant tightening in the Age Pension asset test, and limiting of superannuation tax concessions is a worry for those who have made sacrifices in life, so they can afford a comfortable and dignified retirement.

In its proposal, the Labor Party has suggested that, if elected, it will not allow unused franking credits to be refunded to taxpayers as cash. This change would effectively mean that those on low tax rates would pay more tax. This would impact most super funds (especially self managed super funds paying retirement pensions) and individual taxpayers with a taxable income of less than $138,000.

The only people exempt for this additional tax liability would be those on Centrelink and Veterans’ Affairs pensions and allowances, and SMSFs with a member in receipt of a pension or allowance on 28 March 2018.

Our assessment of the impact

This proposal is certainly controversial, but what is the impact on most Elston clients? Our typical client is a couple in their early 60s, either retired or very close to retirement. These clients ran a small business during their working career, and have a high school education. They have around $1.2m invested in a balanced portfolio, most likely through their self managed super fund.

The income they expect in the next 12 months from their balanced portfolio is 3.28% or $39,360. With franking credits included, this increases to 3.96% or $47,520. If they are retired, there will be no tax to offset the franking credits, resulting in the $8,160 franking credits being lost – which is a 17% fall in income. This equates to a return reduction of 0.68% pa.

While this may not seem like a huge amount, over the course of a 30 year retirement, this could add up to a significant amount of money. If we assume that these clients retire at age 63, then by the time they reach age 93, their asset position would be as shown below. This assumes that the couple spend $70,000 pa in retirement.

Current Arrangement: $984,110

If refundable franking credits are abolished: $540,770

How to reduce the impact

It should be noted that estimates such as these assume that there is no change to the way the money is invested. However, actions can be taken to reduce the impact. Elston Asset Management are tax aware managers, which means that they consider the after tax outcome for clients, when making decisions. If the tax situation changes, then the decisions can also change. For example, they may put more money into companies expected to return more growth and less income. They might also look to trade more regularly, so more profits come from growth, instead of franked dividends.

While it’s not guaranteed that this will become law, Elston can assure all clients that we will be doing everything possible to mitigate the impact, if this change occurs. To better understand how this may affect you, please speak to your Elston adviser.

Note: The values shown are in today’s dollars and have been adjusted for inflation, assumed at 2.5% pa. We have also assumed that the portfolio return before franking is included, and is 7.7% pa.

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.