It is disappointing that the debate around refundable franking credits has denigrated into class (and age) warfare in regards to who is most ‘entitled’ to the savings expected to be derived through Labor’s proposed policy change should they come into government in May 2019.
It was Chris Bowen’s comment that “if you didn’t like our policy then don’t vote for us” that riled many who understand the importance of tax policy settings that provide fairness and equity. It’s a policy that clearly targets the largest retirement asset pool in Australia, via SMSFs where 47% of funds (in 2016) had members making pension payments, and therefore eligible to tax exemption within the fund. With the average member balance in pension phase at $1,002,586, the policy intended to go to the heart of larger SMSFs. The question is however, will this tax revenue saving being achieved?
The response by the Coalition Government was to introduce legislation that allowed for the number of members within a SMSF to increase from 4 to 6. If this measure passes both houses of Parliament (now referred to a Senate Economics Committee due by 26 March 2019), I suspect the impact will be minimal given that historically the number of funds members from within ATO statistics has never exceeded 2 (current average of 1.89 members – ATO statistics to Sept 2018). Sure, adding kids into the SMSF can help alleviate some of the loss of tax benefit, but it will arguably throw up an equal number (if not more) challenges to be considered as well that may not justify taking such a step.
A blunt response to Labor’s policy?
An area that that has the potential for aggressive strategy considerations within the SMSF industry in response to this measure is through fund investments that do not reflect commercial terms… yes, you heard me correctly, through ways in which the non arm’s length income (NALI) rules would apply. Now, of course the context of ‘commercial terms’ for an SMSF need to consider both:
- Super law context within section 109 of the SIS Act; and
- Tax law perspective within section 295-550 of the ITAA 1997.
So, how could a SMSF derive non-arm’s length income? Consider the following taken from within the NALI provisions:
- Income from non-arm’s length transactions;
- Private company dividends;
- Trust distributions where there is no fixed entitlement; and
- Trust distributions where there is a fixed entitlement.
For example, where a fund is expected to lose $20,000 of refundable franking credits, this could equate to looking at a strategy that would provide up to $44,444 worth of income subject to the NALI provisions (taxed at 45%).
SMSF Day events
In the session ‘responding to change’, Aaron will be contemplating a range of strategy considerations in the upcoming SMSF day events around Australia from 29 March to 8 April. To find out more and to register, visit our SMSF day event page.