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Two separate measures relating to franking credits in the space of two months have set alarm bells ringing at the SMSF Association.
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Off-market buyback measure sparks fears of further policy change
04 November 2022
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Two policy measures that change the tax treatment of franking credits in the past two months are sparking fears that there could be more to come from Labor on the issue, SMSF Association policy manager Tracey Scotchbrook says.
Speaking at a recent presentation, Ms Scotchbrook said the government had released draft legislation in September that would prevent companies from attaching franking credits to shareholder distributions that occur outside the normal dividend cycle where they are funded by capital-raising activities.
Then the recent budget had announced revisions to the tax treatment of off-market share buybacks of listed public companies.
“The proposal is to align the tax treatment of market share buybacks undertaken by listed public companies with the tax treatment of on-market share buybacks, Ms Scotchbrook said.
Under the current tax treatment for an off-market share buyback, Ms Scotchbrook said the difference between the purchase price and the part of the purchase price in respect of the buyback that is debited against the company’s share capital account, was taken to be a dividend.
This meant franking credits could be available on that particular dividend component.
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“In the case of an on-market buyback, no part of the buyback price is treated as a dividend. So we don’t have a franking credit. What has been proposed in the budget is that they’re looking to align the on-market and off-market treatment,” she said.
Depending on the details of the legislation, this could have an important impact for SMSF clients, she said.
“There is concern about whether this is actually the thin edge of the wedge [of the ALP’s plans] to tackle franking credits or whether they are just particularly targeted measures and that’s where it sits.”
SMSF Association chief executive John Maroney said the body did not support the changes.
“They’ve been brought on without any notice or consultation,” he told Accountants Daily sister brand SMSF Adviser. “Based on Treasury’s estimates they will have an impact of more than $500 million over the next few years. A lot of that will impact retirees in the SMSF sector so we think it could be quite a significant hit.”
“Everyone has been encouraged to try and enhance their investment performance. This is one of the ways that investors can get an enhanced investment return because they get the option of the off-market buyback in addition to the on-market buyback and they’re pretty popular.”
Mr Maroney said if the government avoided consulting on this reform there might be a formal inquiry when the legislation was introduced into Parliament.
“When they introduce the legislation it may be referred to one of the Senate Committees to look into so that will probably be the best opportunity for consultation,” he said.
“We’re hoping we’ll have the opportunity to consult with our members and investors and retirees that may be negatively impacted by this.”
In the wake of losing the 2019 election, Labor ruled out introducing its franking credit policies but Mr Maroney said the government had already mooted areas that might be revisited — such as the stage three tax cuts — in the May budget or sometime next year.
“We are wary that there are now two separate proposals on franking credits and so they may try to come up with more ways to try and restrict the benefits that people get from them.”
“These rules have been around for many years and most of the members of the SMSF sector would be affected if the [policies] move further in this way.”
Mr Maroney said the association would be keeping a close eye on the recent policy proposals and consult with investment companies, trusts and other corporate groups raising concerns.
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