What investors can do about franking credit changes

Daryl Wilson

Much has been written about the plan by the Federal opposition (likely to be the next Government) to abolish franking credit refunds. Along with removing negative gearing for existing housing and a 30% minimum tax rate on family trust distributions, this amounts to a three-pronged attack on Australian investors.

The stated targets are wealthy Australians. But the impact will be felt by a much wider group of middle Australia, including millions of retirees. If you’re likely to be affected by the loss of refundable franking credits, here are three things you can do about it. We also cover some investment considerations going forward, a note of caution on investment alternatives, and why ultimately it may not be as bad as you think.

Make your voice heard

If you’re impacted enough to care, then you need to act now. The best chance to stop this is before the next election. We think there's a good chance that the proposed changes will be wound back or scrapped altogether if those who will be affected speak up. Here are three ways you can provide feedback to our politicians.

1. Sign the online petitions from Wilson and Plato.

Both fund managers have started petitions. You can access the Plato Investment Management petition here. The Wilson Asset Management petition is here. Each takes no more than one minute of your time to complete. Do it right now.

2. Write, or speak to your local member

Personal examples can have an impact on local members. If you’re faced with the loss of thousands of dollars of franking credit refunds, and that makes up an important part of your retirement income, let your local member know. It's very hard for them to ignore issues which directly and meaningfully impact their constituents.

3. Make a submission to the house economics committee.

On 19 September, the Treasurer, Josh Frydenberg asked the House Standing Committee on Economics to inquire into the implications of removing refundable franking credits. If you’re really keen, you can find the link to make a submission and guidelines on how to do it here. If you don’t want to make a submission yourself, you may be able to contribute to the efforts of investor groups you may be involved with such as AIA and ASA which will no doubt be making submissions.

If there is a change of Government, and they enact what they say they’re going to, here’s what we think will happen.

One last hurrah

Just this week, Rio Tinto announced a large off-market share buyback. The speculation is that it’s at least partly motivated by the wishes of shareholders to see franking credits paid out. If the likelihood of franking refunds being abolished increases, we’ll see much more of this type of behaviour.

We might see many of our LICs, high dividend payers or companies with large franking balances undertake special dividends, buybacks or other similar transactions to get franking credits into the hands of shareholders. So, don’t panic and sell them too early. You could find the franking credits you receive over the next 1-2 years are much higher than normal.

Action: Be prepared to take advantage of franking credit payouts - don’t sell your dividend payers too early.

The market will restructure

There will be big changes in financial products, aimed at turning franking credits into cash. For example, one likely change is the conversion of LICs into Listed Investment Trusts (LITs). We wrote about this potential trend here.

It doesn't get rid of the problem totally, but it does enable reduced franking credits in return for higher cash distributions. We’ve already seen a couple of LICs do it and there may well be a flood before any legislation comes into force.

Other examples of potential changes might be restructuring hybrids to remove payment in franking credits and instead pay cash. Or moves by stapled securities (including many REITs and infrastructure funds) to maximise distributions from the trust part of the stapled entity while reducing dividends from the Company.

There will be other products that aim to mitigate the impact. We could even see the invention of the anti-franking fund - a strategy that seeks to buy stocks just after they go ex-dividend and sell again before the next dividend to maximise capital gains rather than franked dividends.

Action: Be alert for positive changes to structures and products which might help you to limit the impact of franking credit changes. But see below...

Be wary of some investment alternatives

There’s been a lot of discussion around making changes to investment portfolios to replace lost franking credits. Some examples we've seen have included buying growth stocks, infrastructure and property funds and global stocks. The problem right now is that almost all those types of investments are probably more expensive than the high dividend paying "value stocks" you'll be selling. So, tread carefully. The question to ask yourself is "Will I get a better total return by sticking with what I have (without the franking) or moving to something else." The answer in many cases may be to stick with what you have.

One area you might give some thought to though, is to consider buying some LICs or managed funds which can be more resilient in market corrections - such as long/short or market neutral strategies. It's late in the cycle, and if you don’t already have some exposure to these types of investments, it may make sense to add some now.

Action: Don’t rush into other assets without doing your homework. They may not be better value, even after adjusting for non-refundable franking credits.

You may be able to restructure

If you and your immediate family pay no tax now, you may have limited options to restructure your affairs and escape a hit. It’s the reason why the biggest impact of the proposed changes will be on middle-income pensioners, not the wealthy.

However, if you’re paying tax, you’ll most likely have several options to restructure and reduce the impact. This could include moving dividend-paying assets to tax paying entities, moving super out of an SMSF and into an industry fund, selling direct shares and buying LITs, managed funds or ETFs, reallocating super assets between pension and accumulation members or reducing dividends from family businesses. A good financial advisor or accountant can be invaluable in circumstances like these, where changes in the rules require an analysis of your personal situation.

Action: Make sure you have access to a quality advisor and consult them regularly.

In the end, it may not be a bad as you think

While the headlines are ugly and the worst case for many is significant, there are going to be options to mitigate the damage for many investors. If you’re affected, the best thing you can do right now is to seek to make your story heard before the election. There’s a real chance the changes can be abolished or significantly watered down if the true number of people impacted is understood by our politicians. If not, there will be opportunities for many to reduce the damage. Make sure you stay on top of your options with the help of a good financial advisor or accountant.

Take care and all the best with your investing.


Comments

Please sign in to comment on this wire.
Avatar fallback

Jeff Wecker

Thanks for a great article and some great advice. I will definitely make a submission to the inquiry!

Medium 709245692065ba2ad09c2a09c704d3901371363776

Ann Ritchie

A very helpful article. Thank you

Avatar fallback

richard dobosz

Excellent thank you it will impact me so will off load any Australian stock exposed.. will go 2 etfs. Regards Richard

Avatar fallback

JOHN HOPKINS

Thankyou for the information, my family and SMSF will be impacted by these proposed changes to the franking credits and I have taken steps over the months since Labor has been talking about introducing these laws to re-arrange our super, with some of the suggestions you have put forward.[just in case the changes come in]. Hopefully these law changes have minimal effect on our savings, which we have saved and planned, for our retirement for many years. I have already be in touch with my local member and signed the petitions with WAM and Plato. Thanks again for your comments and insights.

Avatar fallback

John Gates

John Gates Extremely helpful. Just what I have been waiting for. Many thanks.

Avatar fallback

John Ovens

Thanks, Daryl. I will be adversely affected by the proposed Labor policy changes and will not be voting for them at the next election. I have signed the petitions and intend to make a submission to the Inquiry. JVO

Avatar fallback

Troy Dawson

This article is totally misleading!!! Franking credits are not being abolished under the Labor proposal as the article claimed. Franking credits will still offset tax liabilities in the same way in that they have always done (well actually since the Hawke - Keating era). What is proposed is if you do not pay any tax and are not a pensioner, you will not be able to receive a refund of any franking credits. Franking credits will still offset tax liabilities, however if this reduces your tax liability to Nil then any excess franking credit will not be refunded but rather lost.

Avatar fallback

Trevor Ridgway

To Troy Dawson: Since franking credits are 'tax paid' by the company before being transferred to the shareholder , it is in effect theft by legislation that Labor is proposing to impose.This means that franking credits are effectively being abolished to SMSF Pensioners. You use the word lost, I see it as theft. Yet another penalty imposed on the frugal and provident by the envious and greedy union "bullies" parliamentary-wing.

Avatar fallback

Ernst Rudloff

True, but only for Government Pension recipients not for self funded retirees that are just above the threshold for receiving the old age pension and by no means rich people in this expensive and overcharging for everything country of ours.

Medium screen shot 2017 02 28 at 8.02.18 pm

Patrick Poke

Hi Troy - the article states "Franking credit refunds" and "refundable franking credits", it does not state that franking credits will be removed in their entirety.

Avatar fallback

JOHN HOPKINS

If you own shares in a company- does that not mean you own part of that company. If that company pays tax - that company has paid tax on your behalf because you are a owner, a share holder. Why then if a tax has been paid should you not get the tax credits back - sounds like double dipping beaurocrats.

Avatar fallback

Robert Goodwin

One of the key questions to ask Shorten and Bowen surely is If I have my super invested in an “industry fund “ I will still get the franking credit refund if I’m receiving a pension. However if I have my super in my smsf also receiving a pension I will lose those franking credits,which in a lot of cases will be $10k plus or minus Per Annum. This is for someone under the $1.6m cap .Now explain to me how that is fair and not discrimination ?

See 9 more comments