Refund of excess imputation credits – room for compromise?

Written by Bob Deutsch, CTA

Labor’s proposal
to deny refunds for excess imputation credits from 1 July 2019 is a policy
proposal which warrants careful consideration.

This is all the
more so because the impact of the policy proposal, if implemented, will differ
depending on the character of the recipient. In particular, in the context of individuals,
anyone who receives the age pension or part thereof, will be exempted from the
rule that would deny them an excess imputation credit refund.

Further, a
self-managed superannuation fund (SMSF) will also be exempted from this rule if
it has one member who as at 28 March 2018 was the recipient of the age pension
or part thereof (or allowance).

It is interesting
to look at the number of people and the distribution of cash refunds across
four key categories as revealed in the table below:

Cash refund
 Approximate number of people
Other super funds
Tax exempt entities
 Unknown, but includes the Future Fund

Interestingly, of
the 1,160,000 individuals who claim $2.3billion in cash refunds, 320,000 of
them in broad terms are expected to be exempt as a result of the pension rule.
Accordingly, there will be some 840,000 individuals who will be subjected to
the rule.

In the context of
SMSFs, there are apparently 420,000 people involved in such funds, with the
funds receiving somewhere in the order of $2.6 billion in cash refunds. On the
current information available, it is almost impossible to tell with any
certainty how many of these SMSFs will have members who were recipients of even
a part age pension as at 28 March 2018. Given the breadth of the proposed
exemption – one member receiving a part pension of $50 will exempt the whole
fund - one would surmise that the number that would qualify for the exemption
from the refund denial would be significant.

Bob Deutsch, CTA

Still on the SMSF
sector of the $2.6billion case refund received, it appears to be the case that
somewhere in the order of half that amount is received by SMSFs that are in full
pension mode with assets in excess of $2.4million. It would appear to be the
case that that is the main target of the Labor proposal since funds with assets
of a lesser value are likely to already be subject to the Coalition’s
$1.6million cap on funds held in pension mode. Accordingly, such funds will
already be subjected to a 15% tax having transferred the excess into the
accumulation side of their SMSF.

Large industry
funds will not feel the brunt of the Labor proposal as their imputation credit
excess amounts will be absorbed by virtue of the mix of their membership.

What this table
indicates in particular, is that the effect of Labor’s proposal will not be
felt uniformly. Individuals not in receipt of a part or full age pension and
SMSF funds with no age pension members as at 28 March 2018 will be most heavily
impacted, and they in particular will need to rethink the allocation of their
investment funds across different asset classes having regard to the new
environment that will exist if Labor is elected and successfully implements its

Labor is of
course right that a policy which involves no refund of excess imputation
credits was the original policy that was implemented by the Hawke/Keating
Government back in the late 1980s. However, this was, as has been mentioned
elsewhere, significantly revised by the Howard/Costello Government which
introduced a full refund of excess imputation credits some 17 years ago. For
almost two decades people have quite legitimately adjusted their behaviour to lean
more heavily on franked dividends which serve to supplement their income
through the receipt of the very refunds of excess imputation credits that Labor
is now seeking to reverse.

Whilst one might
argue quite cogently that no one would be complaining if no refunds had ever
been allowed, the reality is that people have become accustomed to the refund
of excess imputation credits and weaning them off that reliance is a difficult
and potentially politically challenging process to engage in.

As with all things
political there may be some room for compromise here and Labor might well
consider a more staged introduction of the measure so as to allow those people
most dramatically affected some time to adjust their thinking and their
investments. One possibility might be a phased introduction over a two-year
period during which time a partial denial of excess imputation credit refunds
would be applied.

Members, we
welcome your thoughts via the TaxVine
Feedback inbox.


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