Superannuation sector worried by reforms

The $2.7 trillion superannuation sector remains in the dark over the impact of Labor’s franking credit reforms.

The $2.7 trillion superannuation sector remains in the dark over the impact of Labor’s franking credit reforms amid concerns from sections­ of the financial sector that rules requiring that savers be treated “equitably” will force an overhaul of the way member returns are calculated.

While hopeful that Labor’s plan to raise an extra $56 billion in revenu­e over a decade by banning refunds for excess franking credits will not impact large regulated superannuation funds, there has been confusion over the interpretation of rules requiring equitable treatment of members.

Most large union-and-employ­er-backed industry funds and bank-run retail funds believe they will mainly avoid the impact of Labor’s plan, with some parts of the sector describing the effect on their operations as ill-informed.

The rules relate to the requirement of funds to not cross-subsid­ise members within their pooled arrangements.

This means that members must be “credited” or returned the right “unit pricing” for the investment option in which they hold their assets­ — not that cash refunds for franking credits be spread across fund members.

While large funds regulated by the Australian Prudential Regula­tion Authority generally don’t ­really receive excess franking credits refunds to a large degree — as the trustee owns the assets, not the individual members of a fund — retirees in funds who are in a pension phase are currently paid a crediting rate that is designed to allow for the special tax status of pensioners who are entitled to franking credit refunds.

Because super funds pay tax on contributions and investment income­ — generally at about 15 per cent — the entities are able to use franking credits, not excess refunds, to offset their tax liabilities. Excess refunds, which Labor has proposed to ban, are paid when franking credits are in excess of a shareholder’s tax liability.

According to the latest APRA figures, most retail funds generate enough income and receive enough contributions to generate a sizeable tax liability, which allows­ them to offset that liability with franking credits.