Future without franking

The loss of cash refunds could be a good thing for tax-obsessed investors

The Liberal Party implosion has shortened (to use a bad pun) the odds of Labor winning the next election. Suddenly retirees are faced with the reality that they might actually lose the cash refunds of imputation credits after all.

The emotion over this issue is unprecedented. So much as mention the removal of cash refunds in polite company and prepare yourself for an hour’s worth of indignant lecturing about how unfair it is. There is a stream of political winners (industry funds) at the expense of the retirees who lose out.

But I am more concerned with the question of what you could do about it. Here are a few points on that:

• It may never happen. Labor may not win the next election.

• Even if Labor does win, it may have to water down the somewhat unforgiving stance it has taken so far. It can afford to play tough right up until it loses the votes of 660,000 SMSF superannuants. If it needs them, this policy will be reviewed and may even be forgotten. Forgiving it might even win votes Labor wasn’t going to get, such will be the relief.

• Even if Labor does win and pushes ahead with an uncompromised policy, it still has to get it legislated. If there is a hung parliament (and even if there isn’t), it may still struggle to achieve that.

• Even if Labor wins and gets the changes legislated, the current intention is that they would be introduced from June 2020. In which case the 22 months before June 2020 could end up being a super bumper year of franking giveaways by Australian corporates with bloated franking accounts. So don’t jump out of the big, fully franked, high-yield stocks yet.

• Don’t get too concerned about the “whole market” turning its back on the high-yielding fully franked stocks like the banks and Telstra. The section of the population that won’t be able to utilise franking credits and may desert such stocks is the minority in a zero-tax environment with less than $1.6 million in super. There are plenty of other sentimental and fundamental issues that will overwhelm this one.

• The obvious advice from my industry will be to look to replace the lost income with some other return. Some of the recommendations will focus on yield, buying the lowest-risk stocks with the highest yields to replace the lost franking. Hence the predictable recommendations to buy hybrids or real estate investment trusts or bonds. Other recommendations will tell you that you have to take more risk for a higher return and in so doing the focus shifts from yield to a higher total return (capital plus income), which, oddly enough, should be your constant pursuit, not a new pursuit. Those recommendations will very likely include the suggestion that you desert Australia and invest in global equities, through funds or exchange traded funds. At least that’s what the global equity and ETF marketing departments will tell you – this is their opportunity to snag your interest.

• Some investors might decide to abandon equities and look at property. They are very different investments. I’m not sure the average SMSF share investor will be any good at property investment, not if they are starting from a zero-experience base.

• The franking shock might be a good thing. If this legislation snaps some investors out of their zombie-like pursuit of franking credits, it might be the best thing that ever happened to them. Buying high-yielding stocks by definition means buying mature companies with limited growth opportunities. We have a population of investors seduced by a tax fiddle that distracts them from the main game, which is to maximise the total return.

• The 45-day rule becomes redundant for some. For those in a tax-free environment who have had to concern themselves with the 45-day rule, if you’re not going to get the franking you can now forget it. Buy and sell stocks and strip the dividends at will over any time frame.

• There are some suggestions that you move money from super into your personal name to take account of your personal tax-free threshold and pensioner tax offsets. Be bloody careful before you do that.

• Watch out for predators with fancy new products. There is nothing for nothing in this world. This issue has created a demand for some sort of franking credit replacement. Someone will come up with a product to fill that gap, and while they market something that may appear to meet that want or need, as always with these things, like the fads in ETFs, there is always a price to pay tomorrow for the benefit today. This is a huge marketing opportunity. Beware someone promising a franking substitute – they have their other hand in your back pocket.

• Finally, accept. If it’s gone, it’s gone. Don’t then blow the nest egg trying to get it back. If you need to replace your cash refunds with another return you will need to take more risk or accept a lower standard of living. Better that than you blow your capital trying to get back what has been taken away.