Fu­ture with­out frank­ing

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

Money Magazine Australia - - THIS MONTH - Mar­cus Padley is a stock­bro­ker with MTIS Pty Ltd and the au­thor of the daily share­mar­ket news­let­ter Mar­cus To­day. For a free trial go to mar­cus­to­day.com.au. Mar­cus Padley

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.

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