One investment firm has said that, in its current form, the proposed Labor changes to the franking credits regime do not pass the fairness test for Australian investors.
At an event in Sydney today, Stephen Bruce from Perennial Value Management Limited said that while an economic argument could be made, the bottom line was that the proposal wasn’t up to scratch.
The proposal, announced over a year ago by shadow treasurer Chris Bowen, is to scrap cash refunds on excess dividend imputation credits with exceptions for pensioners.
“Our view is that you can make an economic argument that refunding franking credits should be stopped and wasn’t part of the original imputations system, but the bottom line is that the current proposals fail both the fairness test, as they clearly treat different classes of investors differently, and they are also likely to be circumvented by those with the largest balances anyhow,” Mr Bruce said.
Mr Bruce, the director portfolio manager for Perennial, said that while the majority of people would be unaffected, it was still unfair.
“The important point in this debate is that three-quarters of people will see no change; it’s the one-quarter that will be affected in a way we think is unfair,” he said.
It is this percentage of people affected that is currently the cause of debate amongst the two major parties leading into the election.
Grounds for debate
Labor claims that the policy is closing down a tax loophole that costs $8 billion a year and only generates more wealth for the already wealthy.
“Much of this goes to high-wealth individuals, with 80 per cent of the benefit accruing to the wealthiest 20 per cent of retirees.
“Labor does not think it is fair to spend $8 billion a year on a tax loophole that mainly benefits millionaires who don’t pay income tax – not when school standards are falling and hospital waiting lists are growing longer,” Labor said in a statement.
The Liberal Party, after a controversial and much-criticised inquiry into the proposal determined that the policy affected more than just the wealthy.
“The ALP’s policy will unfairly hit people of modest incomes who have already retired and who are unlikely to be able to return to the workforce to make up for the income they will lose,” said Liberal MP Tim Wilson, who chaired the inquiry.
Luckily for investors, it seemed that the proposals would not make it into legislation, Mr Bruce said.
“Fortunately at this stage at least, regardless of the election outcome, the senate crossbench would be unlikely to support the proposal, at least in its current form,” he said.
The real world impact
If the proposals did make it through then, it was unlikely to have a huge impact on dividends, which performed strongly without franking, Mr Bruce said.
“I've just highlighted how important dividends are to total return outcomes, and that doesn’t include franking credits.
“With the market trading on a dividend yield of 5 per cent excluding franking, that still stacks up very well compared to fixed income and term deposits.”
A potential solution would to be impose a cap on the credits, Mr Bruce said, which would protect the average balances.
“Maybe one solution is that we will end up with a regime where we do allow a refund of franking credits but with a cap on it, which protects the typical person with an average balance but stops the very wealthy from getting millions of dollars,” he said.
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