Chris Bowen blasts ‘overweight’ Aussie investors as fund sells shares to beat ALP franking move

Chris Bowen says the current franking credit system encourages local investors to overinvest in Australian shares.

Shadow Treasurer, Chris Bowen. Picture Kym Smith

This afternoon shadow Treasurer Chris Bowen refused to back down on the ALP’s policy to rewrite franking credit rules and warned the current system of dividend refunds encouraged Australian investors to be overweight Australian shares which was risky.

He also added the current regime was unsustainable.

“Politics is about choices — and Labor makes no apologies for choosing schools and hospitals over tax concessions that overwhelmingly benefit the wealthy,’’ Mr Bowen told The Australian this afternoon in a statement.

“The cost of excess imputation credits will soon outweigh what the Commonwealth spends on schools or child care. That’s unfair and unsustainable. 92 per cent of taxpayers do not receive excess imputation credits and Australia is the only developed country in the world that allows these credits.

“Investors should make economic decisions because of economic fundamentals not because of favourable tax treatment. The current system encourages people to be overweight Aussie shares meaning they have not adequately spread their risk and may suffer significantly in a downturn because of this overweighting.”

He argued “vested interests” were acting to protect their own wealth.

“Vested interests are working hard every day to protect their financial interest and to protect the tax concessions that enhance their wealth.

“The Liberal Party is more interested in protecting vested interests, protecting the banks and retail funds and protecting tax concessions that overwhelmingly benefit the wealthy”

The shadow Treasurer’s comments came after the nation’s largest and oldest listed investment company, Australian Foundation Investment Co, dumped shares in BHP and Rio Tinto to capture the value of franking credits for its mostly elderly, retired shareholders before the dividend imputation system is ripped up by a future federal Labor government.

The Melbourne-based Australian Foundation Investment Co said it will immediately distribute much of those funds to its own shareholders, declaring on Monday a special dividend of 8 cents per share to be paid in late February as it races to get the money into the hands of its shareholders so to beat any devaluation of the franking brought on by a change in government.

The company also revealed that its 130,000 investors was were asking why they were being punished for its investments in some of Australia’s largest companies. “This is going to hurt a lot of people who are saying ‘I’m not rich, I’m not wealthy and why am I being forced to go on a higher tax bracket through this?’,’’ Australian Foundation Investment Co chief executive Mark Freeman told The Australian.

“I think the key message is we are responding to the feedback we get from our shareholders. The consistent feedback we have had from our shareholders is this is a significant issue for them, they are saying ‘help us please’ because they don’t have a voice and most of them are elderly retirees,” he said.

“People feel hurt that they are being classified as rich and wealthy and don’t understand why they are being forced into a higher tax bracket because they are not getting the credit back. Why them?”

AFIC is the latest investment fund to re-engineer its share portfolio in the lead up to the federal election. The moves come in the wake of an ALP policy launched last year under which it would end the dividend imputation system which has been running for almost 20 years.

The $7 billion fund told the market on Monday it had sold more than $120 million worth of shares in the twin mining giants over the last few months, walking away from large holdings in Rio Tinto and BHP, which are cornerstones of most conservative share funds. AFIC sold $105 million worth of Rio Tinto shares, or 40 per cent of its stake, and 3 per cent of its BHP shares, worth just under $16 million, into share buybacks from both companies.

AFIC co-chief executive Mark Freeman. Picture: Aaron Francis

Mr Freeman told The Australian the selldown, as well as the payment of the dividend, was directly linked to the looming changes to franking as unveiled by the ALP.

“We will get them (the dividends) out to shareholders because there is no point in sitting on those if the rules shift,’’ he said. The dividend will be paid this financial year to get ahead of any policy changes implemented by a Labor government from July 1.

“Under what is being proposed, we would probably have to reassess the way we look at these decisions, because the share buybacks are a way of getting franked dividends, [and] profits back to shareholders,” Mr Freeman said.

Mr Freeman said the ALP plans meant a conservative long-term investor like AFIC had to consider its own equities holdings and selling down shares if that meant it could safeguard franking credits for its own investors, many of whom were retirees that relied on these credits to pay for the necessities of life.

The comments came as AFIC released half-year results which showed that its net profit rose 75.4 per cent to $239.8 million as its investment income increased 62.5 per cent to $250.3 million. The strong leap in income was partly driven by recognition of share buybacks from Rio Tinto and BHP and the booking of a dividend from the demerger of Coles from Wesfarmers.

The company declared an interim dividend of 10 cents per share fully franked, flat against last year, as well as the special dividend of 8 cents per share. Both dividends will paid on 25 February.

Australian Foundation Investment Co is the largest investment company on the ASX and was founded in 1928. Its board is responsible for a $7 billion equities portfolio dominated by Australian. companies. It has more than 130,000 shareholders, many of whom are retirees and pensioners.

Last week the $360 million Mirrabooka fund, which is also part of the Australian Foundation Investment Co stable, announced it would pay its traditional end-of-year special dividend more than six months early to get ahead of Labor’s promise to scrap the cash rebates investors receive on franking credits.

Last year, Labor leader Bill Shorten unveiled a policy to claw back nearly $60 billion over 10 years by abolishing cash refunds for excess dividend imputation credits.

Mirrabooka was the first listed fund to alter its dividend policy in the face of the looming federal election that, which Labor is widely tipped to win.

Other Australian public companies, which together are sitting on an estimated total of $45 billion in franking credits, could also be considering how the change in policy could hurt shareholders/

Investors and the business community have hit out at the policy. In November Australia’s most successful retailer, billionaire businessman Solomon Lew, labelling the Labor policy as “unfair”, saying it would that will touch every member of the workforce as well as rattle shares held in Australia’s $2.7 trillion superannuation system.

In November deputy chair of a standing committee investigating the ALP policy and Labor parliamentary party member Matt Thistlethwaite told The Australian the policy was fair.

It would help repair the federal budget and ultimately be of benefit to retirees, as the money saved from the initiative paid for healthcare and aged care,” he said.

“We believe the policy strikes the right balance. According to the Parliamentary Budget Office, overwhelmingly those affected have asset balances in their self-managed super funds above $1 million,’’ he said.

According to an analysis of the proposal by the independent Parliamentary Budget Office released this week, funds with more than $1m claimed 82 per cent of the franking credits, worth $2.1bn a year.