Super lost and franking credits wasted

Article published 22 November 2019

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ONE third of Australian employees have been robbed of $3.6 billion a year as employers underpay compulsory superannuation.

In response to this, the Australian Government will provide law-breaking employers with amnesty from penalties and a tax deduction for those who repay the funds they owe. The aim of the amnesty is to recoup unpaid funds in the fastest way possible.

The Government expects to recover only $160 million in unpaid super over the entire 26 years that super has been compulsory. The Australian Council of Trade Unions stated that this equates to recovering 1 in every 100 stolen dollars.

It appears that employers are not the only ones disadvantaging workers. Super funds waste opportunities to increase annual returns for members by ignoring the tax implications of their investment decisions.

The success of superannuation investment managers is usually measured against before-tax returns rather than after-tax returns. A typical member ends up with a super balance that is $200,000 lower than if they had been in a super fund that focussed on after-tax returns.

There are ways in which superannuation funds can reduce the tax they pay and they really ought to do so to act in the best interest of their members.

Franking credits are an important way of minimising tax by super funds. Franking credits are earned when dividends are returned to investors who own shares in Australian companies. These shares have already been subject to Australian company tax, to avoid being taxed twice shareholders receive a tax credit. Franking credits can then be used to reduce the total tax a super fund pays.

Obviously, if the performance manager of a super fund is measured on a before-tax basis, she or he is not going to worry about franking credits. This may mean, she or he sells a stock before the fund has owned it for 45 calendar days, which means that the fund does not qualify for any franking credits for this stock. That can mean forfeiting a lot of money for the fund and its members. Something forgotten in the recent debate in which retail and industry funds were portrayed as hoovering up franking credits: it turns out they don’t.

Similarly, the fund manager may not favour stock paying franked dividends at all and just target profits based on the share price. This may actually increase a fund’s end-of-year tax bill.

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