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Dividend credit changes present lesson in diversification

Money in a jar, savings, cash

The dividend imputation debate could linger until the next federal election, a financial planner has said, arguing that the floated reforms are a lesson in diversification.

According to senior financial planner at Omniwealth Andrew Zbik, the dividend imputation credits debate is unlikely to taper out soon.

As it stands, Bill Shorten and the Labor Party have proposed scrapping the cash refunds on excess dividend imputation credits.

This means individuals exempting pensioners, as Labor announced on Tuesday – and superannuation funds would no longer be able to claim cash refunds on excess imputation credits that had not been applied to offset tax liabilities.


While interested and affected parties discuss the ramifications of this proposal, Mr Zbik argues the big-picture issue is that Australian investors are now overweight in shares, thanks to the current dividend imputation system.

Mr Zbik held up Credit Suisse research, which found that super funds currently own about half of the Australian stock market, as proof of the “handsome boost to income” the dividend imputation system grants.

Further, ATO research finds that SMSFs have about 46 per cent of their assets in Australian shares and trusts, compared to just 6.4 per cent in international shares.

With this in mind, he explained, “There is no doubt in my mind and experience that the dividend imputation credit system has skewed Australian investors to have an overweight allocation to Australia shares.

“Australian shares are defined as a ‘growth’ asset and are susceptible to greater volatility compared to property and fixed income assets.

“The chase for yield has been attracting many Australian investors for two decades. But the consequences of a lack of diversification have been demonstrated in the last year.”

He compared a series of global ETFs with a domestic ETF to illustrate his point.

Exchange traded fund Explanation 1-year return 3-year return 5-year return
Vanguard Australian Large Companies ETF (add approx.~1% extra pa to factor in benefits of dividend imputation credits) Invest in roughly top 300 companies in Australia







iShares Asia 50 ETF Invest in top 50 companies across Asia 34.21% 14.53%pa 17.01%pa
iShares S&P 500 ETF Invest in top 500 companies in USA 13.43% 10.98%pa 20.31%pa
iShares Europe ETF Invests in top 350 companies across Europe 13.57% 4.05%pa 11.33%pa

Reflecting on these numbers, Mr Zbik said, “Regardless of the outcome on the political debate about how to treat excess dividend imputation credits, investors should not allow tax policy to drive their asset allocation.”

Dividend credit changes present lesson in diversification
Money in a jar, savings, cash
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