1 December 2018
Earlier this week, the man who may be our next treasurer, Chris Bowen, reiterated the
ALP was not interested in amending its plans to scrap cash rebates for franking credits
— a key element of income for many retirees.
The crux of the issue is that retirees, who in good conscience saved money in super,
are having the rug pulled from under them. They are being treated as companies,
effectively being taxed at 30 per cent on part of their income, with their tax-exempt
super status being ignored.
I am going to run through several scenarios that would allow an investor to sidestep
the franking credit plan, but first it does need to be put in perspective. The Labor
Party’s plans to make a retrospective change to super not only adversely affects about
one million retirees who are not eligible for a part or full age pension, but also
undermines the confidence in the system.
Why would the younger generation bother trying to save for retirement by way of
extra super contributions when governments (both Coalition and Labor) make taxgrabbing
changes that are backward looking?
The result? Less money saved by Australians for retirement and a heavier reliance on
the public purse.
Geoff Wilson, founder of Wilson Asset Management, says: “This is bad policy. What
Labor doesn’t understand is that all Australians are intelligent. They will adjust their
finances to minimise the impact of this money grab from Labor. The $5 billion-plus
Labor talk about raising per year is discriminatory, unfair and illogical. The money they believe they will raise is a mirage.”
Wilson is best known among investors for a string of listed investment companies
such as WAM Capital and WAM Leaders fund. In common with other LICs such as
AFIC and Argo, Wilson will face a dilemma if the new rules become reality — the
LICs will lose out as investors steer away from products where the franking credit
attractions have been removed for retired investors.
Indeed, Wilson said he would be forced to convert all his group’s LICs to unit trusts if
the ALP win, and other LICs would no doubt do the same creating legal costs for
every LIC in the market.
As professionals such as Wilson think the issue through, the biggest problem is that
not all retirees will make the right decision when these changes arrive and some will
expose themselves to riskier investments chasing unfranked dividends. Timing is also
an issue. With the royal commission putting a dampener on bank share prices, anyone
thinking of bailing out of fully franked bank shares to unfranked investments will lock
in a loss of 10 per cent over the past 12 months.
For the people thinking about what they can do to counteract the impact of the policy,
here are three potential workarounds:
1. If you don’t want to lose your exposure to fully franked blue-chip shares such as the
banks, BHP and Wesfarmers, one option is to sell the shares the day before they
declare their dividend, known as the ex-dividend date. You then buy the stock back the
next day after the share price falls. The problem with this approach is that the share
price usually falls by the cash dividend amount alone, not by the total value of the cash
dividend and franking credits.
2. An alternative strategy that is gaining traction with retirees is to move into listed
property investments via real estate investment trusts, which are seen by many as the
closest comparable investment to fully franked bank shares. REITS are property trust
structures that trade on the ASX. Unlike normal shares on the ASX, REITS do not
withhold tax as all distributions are taxed in the hand of the investor.
3. For the more passive investor, there are several ETFs that can invest in unfranked
investments such as Betashares Legg Mason Real Income Fund that holds a portfolio
of largely unfranked property, utilities and infrastructure assets While it is still too early to panic, the writing is on the wall with regard to the scrapping of cash refunds on excess imputation credits.
James Gerrard is the principal and director of financial planning firm