Tax credits plan misses bigger picture

As they stand, the Opposition's proposed policy changes to scrap the refund of excess franking credits continues to cast doubt over the investment strategies of self-funded retirees. Should the policy come into effect, the SMSF Association estimates that it would result in a $5000 reduction in income from an SMSF retiree earning $50,000 a year - a 10 per cent difference. Further, it is estimated about 1 million Australians retirees would be impacted, even after concessions were made to those receiving the age pension.

While such a policy unfairly targets retirees who have come to rely on the cash refund of franking credits as a significant proportion of their pension income, complex financial arrangements that allow large institutional investors and superannuation funds to benefit from additional franking credits appear to be flourishing.

The use of securities lending arrangements for trading strategies and settlement purposes has been common in Australia for a number of years, but there has been recent concern over the use of these arrangements for the primary purpose of obtaining an imputation benefit. Such strategies are structured with the goal of receiving additional franking credits the investor otherwise would not have been entitled to.

Such an example occurs where an investor already owns shares in a company that will soon pay a franked dividend. The investor lends their shares to a third party, then using the funds made available as part of the lending arrangement, buys additional shares in the company. This allows the investor to access additional franked dividends without the outlay of funds.

The Tax Office issued an alert on the area in February and has caught several large superannuation funds using convoluted arrangements to receive about $50 million in additional franking credits in just one year.

Other commentators have pointed to overseas investors, who would otherwise not be entitled to franking credits, lending their shares to retail and industry funds so the borrower may receive the franking credits - often shared equally between the two parties.

With so much attention being given to the cash refunds of franking credits for self-funded retirees, one can only wonder why similar attention isn't being given to these strategies by large institutions and superannuation funds who are being left alone to unfairly benefit from the dividend imputation system.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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