By James Kirby
Cornered by its own election promise not to change the tax framework for older Australians, the government is now trying other avenues to choke off franked dividend tax benefits.
A plan by Treasurer Jim Chalmers to cut back on franked dividends related to special dividend payments looks at glance like a minor change, but if delivered as planned, it means private investors could be up for unexpected tax bills linked with past dividend payments.
It certainly makes little sense to seek submissions, plan amendments and create new regulation on a measure, which is officially expected to raise a paltry $10m a year.
But this may well become a test case for the ALP to move on reforms it put on ice in order to win the May election.
In publicly testing any change to franked dividends, the Treasurer gets to gauge sentiment on all investor tax arrangements from super concessions to negative gearing.
Next month, we have the first budget from the new government and we already have some clear signals on tax policy changes.
In pre-budget submissions, several key stakeholder groups have suggested a per capita cap on the amount that an individual may keep inside the superannuation system:
The proposal now looks likely to be implemented.
If so, it is also a de facto cutback on franking benefits; investors with large amounts in super will be forced to take money out of the system lessening the benefits of franking credits.
If both moves become reality – no franking on many special dividends and less franking benefits for large amounts held in super – then the franking policy could remain in place, but in practice, its cost to the government has been substantially peeled back.
The special dividend franking has been controversial for some years – it was originally criticised by Scott Morrison when he was Treasurer in 2016.
In fact, Treasury has long held reservations about companies that raise money and offer special dividends around the same time.
But a further suggestion from the government that the special dividend franking changes could be backdated have been sharply criticised.
Don Hamson, MD of Plato Investment Management suggests: “Move on policy if you wish, but never backdate – that is exactly what the market does not want to see”.
Similarly, fund manager Geoff Wilson of Wilson Asset Management has warned the backdating of the measure would have a much wider impact financially than the government has indicated.
As franked dividends return to the spotlight, investors are also watching carefully for any changes around superannuation or property investment.
If the proposed cap on the total value of individual super in the system goes through, the limit is likely to be $5m per capita – this is the figure put forward by key groups, including the Association of Superannuation Funds Australia.
Inside the wealth management industry, senior figures have already accepted the Treasurer is also likely to halt an expansion in the superannuation tax free cap – which is the maximum amount that can be held funding tax-free income and is currently set at $1.7m.
Indexing – which ensures settings reflect inflation changes – is due to trigger a lift in the cap by $200,000 next financial year.
In turn, this would mean the budget would include an expanded total cap of $1.9m from July 1, 2023.
There is strong speculation the Treasurer will not allow this increase to go through and ‘freeze’ the indexation.
Ironically, there will be less pressure to intervene on contributions caps because they are linked with wage inflation, not consumer inflation, and at current levels would not trigger indexation-based increases.
Alongside the speculation around super caps, there are also concerns the Treasurer will close off borrowing in Self Managed Superannuation funds where there has been a strong increase in borrowing for investment property, even though there have been recommendations to shut down the practice, particularly from the Murray Review in 2018.
The most recent data from the government suggests that about one in ten self-managed super funds have borrowings generally linked with investment property – the total borrowed is close to $20bn.
All of the ‘big four’ banks have pulled out of the SMSF lending market flagging higher compliance risks compared to ordinary home loans.
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