Franking Credits - Strategy for a SMSF

Much has been criticised about the ALPs strategy to burn refundable franking credits. And people keep saying it will affect SMSFs more... I kinda agree. But the issue could provide a benefit to some. All they need to do is think differently about the problem.

SMSFs affected by the loss of franking credits just need to adopt a multi-generation aspect to the fund. Get the adult kids on board as new members. It may even assist with estate planning and control issues as parents age. The proposed laws to increase the number of members to 6 will play perfectly well with that.

Then the retired parents will have their adult kids join the fund. The adult kids likely will have taxed employer contributions. The excess franking credits will offset and act like it pays the contributions tax. BUT the member accounts for mum & dad will be credited with the proportionate value of the franking credit refunds that are applied to their kids because the notional contributions tax gets allocated to the respective member. Everyone is a winner except the ALP tax grab,

For those people with shares outside super, planning alternatives should be explored.

 

Not confident this one will ever see the light of day.

 

Assuming adult kids agree to do so.

 

Works with 4 members. No law change is needed. 2 are retirees with tax free pensions and two are contributing members.

 

My simple maths say not enough to offset the loss of franking credit. Max adult kid super contribution is currently $25k meaning $3750 super tax so for parents with decent smsf balance would still lose out. Am I correct?

 

Kids will pay 15% earnings tax on accumulation balances too, thus further mitigating (unless their investments also pay FF dividends )

 

Kids will also have tax on their share of earnings. Its easier to assume a moderate earning rate and determine a nominal base earning amount then add their potential taxed contributions. Multiply x 15% then review the tax credit gap.

What I would like to know with the shorten proposal is - Does it mean a smsf can maintain a franking account ?? This would carry forward and accumulate the unused tax credits for a smsf like a company does. Shorten could easily modify the laws to allow a smsf to maintain a franking account to soften the blow in some cases. This is one of the problems with policy by A4 media release.

And remember that adding extra members adds very little in costs. SMSF costs wont vary much with more members. The members will likely benefit from the fee differential on this basis on top. Just watch insurances. They ALWAYS cost far more in a SMSF.