By Duncan Hughes

The federal government is accused of undermining self-funded retirees with two changes to capital raisings and franking credits in a month, despite election promises the system would not be changed.

Modelling using a recent blue chip buy back reveals self-funded retirees and superannuation savers in accumulation phase would have been between 10 per cent and 18 per cent worse off had the changes been introduced.

Retirees claim they are “confused and angry” about prospective changes they believe will reduce future income and potential retrospective amendments expected to require additional tax payments on realised gains and income.

Fund management and retirement chiefs allege the moves could be part of a bigger agenda to undermine self-managed super fund members compared with individuals who are members of large superannuation funds.

They are planning a lobbying campaign against the budget franking credit changes based on the successful 2019 federal election attack on proposals by then leader of the Opposition Bill Shorten to abolish cash refunds of franking credits.

John Maroney, chief executive of the SMSF Association, said the Budget crackdown on companies using off-market share buybacks to distribute franking credits “came completely out of the blue” despite being involved in discussions about earlier changes.

Mr Maroney said it will affect the future income of up to 300,000 self-managed super funds (SMSF) and around 500,000 scheme members.

According to the Australian Taxation Office, there is around $868 billion in the funds, or around 25 per cent of super assets.

“This planned change to franking credits does matter,” Mr Maroney said. “The government is punishing long-term Australian resident shareholders. It adds to fears that Labor is out to remove franking credits.”

The Budget change is estimated to save the government around $550 million over the next three years.

Rachel Waterhouse, chief executive of the Australian Shareholders’ Association, which has around 6000 members, says there are concerns about a pre-budget announcement that franked dividends deemed to be funded by capital raisings would lose franking benefits.

Ms Waterhouse said they are particularly opposed to retrospective changes applying to dividends paid since 2016.

Ms Waterhouse said: “The government needs to maintain confidence in the markets and self-funding of retirement and ensure a holistic approach to a fragmented tax system, not a piecemeal approach.”

Patricia Manfredi, an 84-year-old grandmother of two and self-funded retiree, describes the proposed changes as “obscene and immoral” for pensioners facing increasing hardships from rising inflation.

Mrs Manfredi, a former translator, said she is particularly concerned that unanticipated tax bills for retrospective changes will force her to draw down capital from her pension.

“I do not have the resources to be funding bills on transactions going back to 2016,” she said. “I worked hard and saved all my life to be self-sufficient and budgeted and planned so I would not be on a state pension,” she said. “That is why having to pay retrospective taxes is totally unfair.”

Major companies have been buying back shares from their shareholders off-market for more than 10 years, often discounted to the sharemarket.

An off-market buy-back tender involved a company inviting eligible shareholders to sell some or all of their shares by a tender process.

The companies compensate the investors for the price shortfall by attaching franking credits as a portion of a dividend and capital return to shareholders, allowing investors such as low-tax super funds to receive extra franked dividends and pay less capital gains tax.

A recent buyback from Woolworths, which offered to buy back shares with an assumed market value of $40 for $34.40, demonstrates how it works.

After adding franking credits the after-tax proceeds per share for a super fund member in pension phase (paying no tax) was about $47. For an accumulation phase investor (paying 15 per cent tax) was around $42.

Under the proposed changes the super member in accumulation phase will receive $40, or a reduction of more than 18 per cent, while a member in accumulation phase would receive about $38.50, or about 9.6 per cent worse off.

Josh Meggs, a partner with Pilot Chartered Accountants, says the outcome for investors will vary according to the buy-back terms.

“This is good news for the Australian Taxation Office and Treasury but it will hurt self-funded retirees and companies,” Mr Meggs said.

Toya Adams and her husband Laurie Shears, who are both self-funded retirees with a self-managed super fund, added: “The government needs to stop tinkering at low-hanging politically acceptable small pieces of fruit for small amounts of money and go for the big injustices in our tax system.”

Fund manager Geoff Wilson, chairman and chief investment officer of Wilson Asset Management, said: “The unintended consequences of these two policy changes by the federal government will be significant. They are weakening the system. This is also the thin edge of the wedge. The government is planning to neutralise the franking credit system, make it less effective and then remove it.”

Mr Wilson has written to 130,000 shareholders urging them to lobby members of parliament to stop the planned changes.

“The current system ensures market stability, encourages capital raisings and investment in Australia,” he said.

A spokesman for Financial Services Minister Stephen Jones was not available for comment.

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