Who are the real winners and losers from imputation reform?

The dust is starting to settle a little on the Labor governments recent proposal to stop the refund of unused franking credits and lines are slowly being drawn in the sand in preparation for battle.

An interesting (but unfortunately obvious) emergence has been the ‘inbetweener’ advocation of battlers that are potentially going to be adversely affected having done the right thing and put aside money for potentially their own self-funded retirement.

For those opponents of the changes, an easy path to take is highlighting the worst case examples of where franking credit refunds will have the biggest impact.

How to conjure a loser from changes

One recent example highlighted a single female retiree, aged 75, who had total assets of $600,000 including a share portfolio of $500,000 and therefore was above the asset tested age pension cutout of $556,500 (homeowner).

The proposed changes see a calculated drop of around $11,000 in franking credit income which against the supposed $30,000 annual drawdown, which is substantial. But the question remains, is this a realistic, or contrived scenario?

Upon considering the situation, my financial adviser warning light starts to burn brightly.

Immediately you begin to wonder why a person in their 70’s would have 100% of their liquid wealth tied up in one equity market. Franking credit benefit aside, the volatility this poor lady would be enduring daily would require nerves of steel at 40, leave alone age 75.  An easy example of this volatility is the recent drop in the ASX20 over March which would have seen the portfolio fall by around $20,000 for the month!

It’s an interesting choice of an illustration that clearly lends itself to emotive bias over what would exist in the real world. The fact that it gets repeated by experienced financial advisers (who just happen to be in the SMSF sector of which franking credit refund benefits make for a great sales case) is a little more befuddling.

To get a better idea of the impacts, we should start by giving this lady a portfolio that is more realistic and then have a look at the franking credit impacts, as shown below. I have assumed a dividend yield for the Australian component of 5%, and a mix of 45% defensive vs. 55% growth assets (which is at the upper end of investment aggression for what you would typically see in a properly setup portfolio for a person at this age and stage).

  Given Example More Realistic
  Weight   Weight  
Total Balance    $       500,000    $        500,000
Cash 20%  $           100,000
Fixed Interest 25%  $           125,000
Australian Shares   (100% Fr) 100% $          500,000 35%  $           175,000
International Shares   (0% Fr) 20%  $           100,000
Total 100%   100%
Franking Credit benefit  $             10,714  $               3,750

Given the above, the impact now drops to $3,750, which whilst not insignificant, is roughly a third of the previously illustrated impact, and highlights that for most cases found ‘in between’ the have and have nots, the impacts of the proposed changes are not as dramatic as initally indicated.

Further thoughts on the proposal

At this point I should make it clear that these changes, recently watered down to exclude current Age Pension recipients, will of course be detrimental to retirees existing cashflow and do exhibit signs of a bit of a ‘new tax’ on self funded retirees. However, as the surge into taxless structures such as SMSF pension accounts continues it is easy to see why some Government revenue tweaking may need to be installed to stem the losses that would otherwise continue unabated.

Considering the MacroBusiness Fund has many SMSF clients, I feel the need to respond in the defense of the SMSF sector. It is obvious that these impacts are deleterious to one of the benefits of choosing an SMSF over other pooled options. Absolutely.

It is important to remember that there are still a number of great reasons to consider one or to remain in one including:

  • control and transparency,
  • combining family assets in the superannuation system,
  • a broader palette of investment options
  • and if the changes come into force, the ability to utilise unused franking credits from one member against another in the fund.


Yes, there will be an impact on previous potential returns for those classed as ‘in-betweeners’ and above from the changes, but it important to focus on your portfolio and not be too persuaded by spurious examples. There are other areas of the investment world, particularly overseas, that offer the potential for better capital returns and have the benefit of a falling dollar tailwind. Superannuation still offers the superior solution for most Australians to build retirement wealth.

Ultimately, it is always a risky move to arrange your affairs solely on the basis of saving tax, and once again these recent proposals have shown that legislation can giveth and in turn potentially taketh away.

Tim Fuller is operations manager at the MB Fund which is currently overweight international equities that will benefit from a weaker AUD so he definitely talking his book. Fund performance is below:

 Nucleus February Performance

If these themes interest you then contact us below. 

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. 


  1. Hahahha 83% asset allocation to equities (Australian only) at 75yo. …at what yield?


    • I actually know a number of retirees who have most of their wealth tied up in shares, most of it Australian LICs. They only care about dividends. They don’t care what the share price does, so long as the dividends keep coming. Some have a stash of cash in case divs get substantially cut in a GFC II scenario, but they will treat such a scenario as a buying opportunity.

  2. One of the best articles I read on this blog.

    “Immediately you begin to wonder why a person in their 70’s would have 100% of their liquid wealth tied up in one equity market.” – spot on. But trust me, MSM and the LIBS will find couple of fools that do have most of their money allocated in this fashion and will present them as everyday pensioner and guess who will be revolting against Labour’s plan – The everyday pensioner that has no clue that this initiative does not impact her/him but only 10% of the very rich people that can afford the hit.

    • proofreadersMEMBER

      +1 Yep, because Straya takes gold, gold, gold in living every possible lie.

    • TailorTrashMEMBER

      Good clear article ……….what would you consider the lower end or “optimal level” of “investment aggression”. ( says a lot about where we are when 5% yeild is the reward for that risk ) for some one at this age and time ?

      • Tim FullerMEMBER

        Thanks for the feedback. Investment aggression is more often the product of the levers that need to be pulled to get the desired outcome. Without straying to far from the point I was trying to make with this piece, a general rule is that you weigh up the income requirements and sensitivity to volatility (and loss) and then look to build the portfolio.
        Of course expectation needs to meet reality, and there may need to be some frank conversations along the way.

  3. “Immediately you begin to wonder why a person in their 70’s would have 100% of their liquid wealth tied up in one equity market. ”

    I think this is quite common with interest rates so low. Grossed up yield on the banks is now approaching 10%. That’s buys a lot of tolerance for volatility.

  4. Who is to say what is or isn’t a “spurious example”. I know several people in a variety of life circumstances and of a whole spectrum of ages who would be negatively impacted by this and poorly formulated policy. Not that many of them recognise it right now. This general lack of understanding around dividend imputation is what Labor are relying on and taking advantage of.

    I have been (unusually for me) quite vocal on this issue, because I do not wish to see further useless complication of our tax system which does not address the real issue here – the taxation of individuals.

    I am actually a fan of Labor’s tax proposals prior to this, but this is crap policy, and Labor will make spending commitments based on these “savings”. Either they don’t understand the implications of what they are proposing, which would be scary enough, or they know exactly what they are doing but are quite happy to play a nasty game of divide and conquer, envy-based politics to serve their own interests while keeping their Industry Super mates happy.

  5. So you’re 75 now. That means you were 49 in 1991 when we had Keatings recession. That’s about the age when she may have got a bit of an inheritance, her kids education and huge expenses like 18% mortgages were starting to become manageable. If you bought CBA, CSL, Telstra and some LICs (they were popular) then, today you’re sitting on massive capital gains tax liabilities so you wont/cant sell. Retail fund manager products barely existed and some charged 8% upfront fees to buy in before the 1987 crash so you held direct equities.Property required borrowing and you didn’t want to do that because you worried about what interest rates would do. Now some wet behind the ears commentator says he wouldn’t have done that. You need to have some history before you pass judgement on the strategies of older people. Oh I forgot, you think they are all rich.Let her follow your strategy. Once she has paid the capital gains tax she can then put the balance to work in unfranked global equities or some low yielding bonds. When she turns 92 she can check the strategy over a similar time frame.

    • Tim FullerMEMBER

      Thanks for the frank feedback Andrew, you have raised some great points in the given example. Sure the investment universe for retail clients has changed dramatically over the last few decades, and a common all equity strategy found in the 80’s was probably suitable given the absence of other options as you have described, even if franking credit refunds didn’t exist at the time.
      In regards to holding large capital gains, the question asked (outside of structuring, because this in SMSF pension capital gains tax liabilities are disregarded) is what is more important, the potential for the portfolio to fall $100k (20%) in a year, or the potential to pay some tax? If the lady in question is comfortable with the downside risks, in return for some franking credits, I would ensuring that this decision is well file noted!

      I suspect the example is exactly that, an example. The point of the piece is if changes to the retirement system are to be considered properly, the commentariat should be responsible enough to present scenarios a little less see through than examples like this.

      • I’ll think you’ll find there are thousands of investors with similar scenarios to the so called example.The privatisations of that era introduced many people to equity investment for the first time. They were risk averse with negligible borrowings. The debt (as is nearly always the case) was in property exposures. They have never been savvy investors and as they age become less comfortable with change. Nearly all change involves tax because capital gains tax came in a little earlier so they are terrified to move. Their descendants inherit their cost base and are left lumbered with massive tax commitments if they sell so they don’t unless forced to do so. They just won’t rebalance because because tax chops so much out of the corpus. As Warren Buffet once said, “asset allocation just means you don’t know what you’re doing”. It’s only risk diversification against a benchmark anyway. The asset base doesn’t ensure a robust income compared to issues related to failing health and family crises either. Your group seems to overstate the wealth of older people and overstates the level of sophistication. Most are trapped by their age and lack of understanding.