Labor franking credits plan splits market into winners and losers

The House of Representatives economics committee inquiry into Labor’s abolition of franking credit rebates is well under way.

The House of Representatives economics committee inquiry into Labor’s abolition of franking credit rebates is well under way. As at the time of writing, a high number of submissions, 435 in all, had been made to the committee chaired by Liberal MP Tim Wilson.

Changes to franking credits is a hot topic for investors and touches many parts of the market and stakeholders.

There has been a remarkable range of responses to the franking plan, which effectively scraps the cash rebates most retirees can get when they hold franked shares. I am not surprised to hear that public hearings on the issue have also been well attended.

To illustrate just how little the detail has been thought out by the federal opposition, you need only look at the submission by Platinum Asset Management.

Platinum points out that the proposal would create an “uneven playing field between listed investment companies (LICs) and unit trust structures”. This would be especially so for those with a zero or marginal tax rate, the case for many retirees.

The Platinum submission correctly emphasises that unit trusts distribute 100 per cent of income on a pre-tax basis, whereas LICs distribute those same trading gains as dividends, only after corporate tax has been paid, and therefore potentially with franking credits attached. As you can see from the Platinum example it is clear that trusts are going to have an advantage under the proposed system. Property trusts or A-REITs will get a boost because of their trust status.

At funds management operations such as Platinum, there is the additional issue that one form of product will be tax-favoured over another. Groups such as Platinum can offer similar investments either in a unit trust structure or as a listed investment company. The problem for Platinum is that their customers who are in LICs are now facing a disadvantage.

Many who approached me have assets in superannuation of about $1 million. They have described the cut in income they are potentially facing, many up to $30,000 per annum.

These retirees need to see an adviser who can provide retail advice to ensure:

● They have the correct asset allocation going forward;

●That portfolios are thoughtfully constructed to ensure potential returns are balanced with risk. Taking on increased risk to compensate for decreased income is not the answer; and

● Strategic advice is given where appropriate to ensure all avenues have been explored, including if there are strategies to qualify for the aged pension.

The more I reflect on this policy plan, the bottom line is the policy discriminates against retirees and those with an SMSF.

I am an adviser to high-net-worth investors; we don’t look after retail clients. As a result most of our clients can take advice from tax advisers in order to adjust their financial affairs. They are in a position where they pay enough tax to utilise franking credits in the first place.

Consequently, the claims by the federal opposition that they are going to catch all this additional revenue from the “wealthy” is based upon a false economy. Despite the federal oppositions claims, in fact the majority who will be affected are those that can least afford what is being proposed.

Among the submissions to the franking inquiry, one from the Grattan Institute that described the proposal as “second best in a third-best world” is a well made point. In the absence of wholesale tax reform, where the government faces a long-term budget challenge, abolishing cash refunds as the ALP proposes, but keeping franking credits for those who do pay income tax, is probably not first-best policy.

Mr Bowen, you have got this policy wrong, and for the benefit of those who can least afford it, admit your error and dump it.

Will Hamilton is managing partner of Hamilton Wealth Management, a Melbourne-based wealth manager.

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