Veteran fund manager Geoff Wilson has blasted Labor for “moving the goal posts” on retirees and warned that investors might pile into property, which would put more pressure on housing affordability.

“You’ve got an 80-year-old in retirement who survives on the cash flow that they get from their superannuation and then all of a sudden, if Labor gets to government, that income will drop,” Mr Wilson said after Labor announced a plan to scrap refundable franking credits.

“These people don’t have the potential to earn any more income. They are relying on the system and Labor wants to change the system so they will be worse off.”

Mr Wilson said self-funded retirees would chase higher yields by switching to assets for which corporate tax rates are inconsequential, such as real estate investment trusts and real property.

“It will drive people into structures that don’t pay corporate tax,” he said. “A real estate investment trust is a classic example, but also real property.”

Pressure on housing
The Financial Services Council had a similar warning.

“Unintended consequences of the proposal could include retirees moving out of shares and into property and bonds,” the council said.

“This may add to house price pressures or lower returns in the longer term.”

People drawing a superannuation pension face annual losses of approximately half a per cent, which for a $1 million fund is $5000, according to Plato Investment Management managing director Don Hamson, who says he is “flabbergasted” by the plan.

“This affects not just wealthy self-managed super funds,” he said.

“My mother received a part government pension and she had a few shares and she would lose all the franking credit refunds for that.

“They were a bonus for her retirement. She used to look forward to those franking credit refunds as an important supplement to her income.”

The abolition of refundable franking credits will affect 200,000 SMSFs, most of which are in pension phase and therefore have zero taxable income.

It will also affect people on low incomes with Australian equities – a non-working spouse, for example.

APRA-regulated super funds will be largely unaffected because their franking credits are exhausted by the offsetting of other tax liabilities. As such they do not generate many refunds.

In 2014-15, half of the total refundable credits of $5.6 billion a year went to the wealthiest 10 per cent of SMSFs, which have balances in excess of $2.4 million, according to analysis by the Parliamentary Budget Office.

In that year the top 1 per cent of SMSFs received an average cash refund of $83,000 but the richest receive cash refunds of up to $2.5 million.

Not a surprise
The Tax Institute said the proposal “should not come as a surprise to anyone”.

“It is what one could readily describe as the politically low hanging fruit – easily done with minimum legislative change; saves a bundle in revenue and causes relatively minimal damage to Labor’s natural constituency,” senior tax counsel Bob Deutsch said.

“It will however, cause some ructions (at least temporarily) in equity markets where tax refunds of excess imputation credits have been an important part of the investment matrix for equity investors, particularly self-managed superannuation funds.”

Franking credits represent the amount of tax already paid at the corporate level.

For large businesses this is 30 per cent. This credit can be used to offset tax owing at the individual level.

For those paying low rates of tax, such as superannuation funds, excess franking credits are at present paid out as cash refunds.

Plato has previously calculated that franking credits have increased the total return for tax-exempt investors like pension-phase super, charities and low-income Australian investors by 1.6 percentage points, giving a tax-exempt total return of 6.1 per cent, over the 10 years to 31 December 2016.

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