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The million $ franking credits question

Graeme Colley
Friday, February 15, 2019

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If you’ve got pre-conceived ideas and plans about franking credit refunds before the Federal election, you need to think again and tread very carefully.  I’ve seen people putting plans in place already, before they even know what’s really going to happen.  How irrational is that?  It’s a bit like being in a coal mine with the lights off and trying to find your way around – not easy.

Besides, before the franking credit proposal becomes law, you need to see a change of party in government and what the legislation will really say.  You also need to see whether it will get through a parliament, where no single party is likely to have a Senate majority. 

Based on what we know, most individual taxpayers and the vast majority of SMSFs will not qualify for a refund of any franking credits, which are in excess of tax payable.  There are some carve outs, but they apply only to those eligible under the ‘pensioner guarantee’, charities and similar organisations. 

The first thing is that the proposed ‘pensioner guarantee’ will apply to Australian government pensioners and allowance recipients.  They will continue to receive cash refunds for excess dividend imputation credits.  The cash refunds will apply to:

·       Recipients of Australian Government pensions or allowances who have individual shareholdings. This includes anyone receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.

·       Self-managed Superannuation Funds with at least one recipient of an Australian Government pension or allowance as at 28 March 2018.

Let’s try to make sense out of whether going on Centrelink will provide any benefits just so you can get a refund of excess franking credits.  There may be some advantages if superannuation is not counted for Centrelink purposes, as it will reduce the assets and deemed income that is counted for means test purposes.  But don’t forget, once you or your partner start receiving a pension, you’re your super, it will be included and once you or your partner are of age pension age super is also included.

You may find that withdrawing amounts from super and investing in your own name may not help get a franking credit refund.  Depending on your age, you may end up paying no tax on your income because of the tax-free threshold, low income earners tax offset, Senior Australian’s Pension Tax Offset and so on.  This may result in you having a tax-free income of at least $18,200 and it could be much more depending on the circumstances.  If, say, just $18,200 represented a return equal to 3% of the amount invested, the total investment would be just over $600,000.  This may disqualify you for Centrelink benefits or if each member of a couple had $600,000 each then neither may be eligible for Centrelink benefits.

There may be some flexibility in qualifying for Centrelink benefits if one member of a couple is under age pension age.  One strategy that is commonly used is for the member of the couple who wishes to qualify for Centrelink may be able to withdraw their superannuation and gift it to their partner to reduce the impact of the assets or income tests.  This could allow the pensioner to qualify for a cash refund of franking credits.  However, the balance is a bit like a high wire act and needs to be examined carefully to see whether there is a real benefit.

Don’t forget to qualify for the maximum Centrelink benefit, your income (including deemed income) must be less than $172 per fortnight or $304 per fortnight for a couple.  Once you earn more than that, the amount of the benefit reduces by 50 cents for each additional dollar you earn.  And if you qualify under the income test, there’s always the shot across the bow from the assets test, depending on whether you own a home.  But for most people, it’s the income test that impacts on qualifying for benefits due to the operation of deeming and any qualifying super you may have.

When it comes to SMSFs, it would appear that the door is closed.  To qualify, it seems from the announcement, that the fund was required to have a member in receipt of a nominated Australian Government pension or allowance as at 28 March 2018.  So those thinking of shopping around to find a Centrelink pension or allowance recipient to add to their SMSF just to access franking credit refunds, will need to think again.

You could always take your money out of super if you qualify and move to a more expensive home, which is exempt from the income and assets tests.  This strategy may qualify you for Centrelink benefits, but you need to ask yourself – will I just end up with a great place to live in and a lot less to live on?

Where to now?

Some strategies may provide a more effective way of using franking credits.  However, don’t get too clever as you really need to wait and see what the legislation looks like before making any decisions.  Any change in investments, whether personally or in your SMSF, need to consider the net after tax return of what you are doing and not just whether you are using any available franking credit more efficiently.

Published: Friday, February 15, 2019

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