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franking credits

Plans to permanently shelve any changes to the franking credits regime is a welcome start to 2021 and a reminder for politicians to listen to the public.

The Christmas and New Year’s break often represents a lull period when it comes to significant announcements coming from Canberra. But there was a difference this year that offered up something positive for retirees.

Almost as soon as 2021 ticked over Labor leader Anthony Albanese notified the public his party would not be including any changes to the dividend imputation, or franking credits, system as a policy platform for the next federal election predicted to occur late this year or in early 2022.

So, it would appear from this Labor has realised just how unpopular the policy was in 2019, particularly among retirees. Still, it did provide the source for the most effective election campaign message in living memory with the instruction from then Shadow Treasurer Chris Bowen that individuals who didn’t like the policy should not vote for Labor. And the public was compliant because it didn’t.

This was always going to be a dangerous policy idea from the start considering how reliant a significant number of Australian investors, including SMSF trustees, had become on the franking credit system.

At the time, analysis performed by accounting firm BDO on a two member SMSF, with both members in pension phase and $2 million of assets, predicted the move would cost a fund of this kind employing a diversified portfolio $7900 per year in franking credit refunds.

Further, BDO warned if the same SMSF was only invested in Australian equities it would lose $34,400 a year in franking credits. An alarming proposition in anyone’s language.

And no sugar coating could make the policy sound any better to the Australian public but it didn’t stop Labor ministers from trying.

One of the more ridiculous arguments was that changing the imputation credit system would aid in reducing the bias investors have traditionally held for domestic stocks and thus ultimately help them as it would encourage greater diversity to be applied to share portfolios.

But of course the case also highlighted another potential flaw in the initiative. If it did encourage greater diversification in equity portfolios it would lead to a reduction in inflows to the Australian Securities Exchange. In turn, resulting lower inflows, and perhaps an increase in outflows as well, would mean lower share prices and that would affect all investors not just those with an SMSF in retirement phase.

I could go on but it’s fair to say there was very little to like about it.

So it’s welcome news, particularly to the SMSF sector, where members are still predominantly retirees, and a good start to 2021.

As usual though we should always keep our perspective when looking at these announcements in the COVID-19 age.

While the 2019 franking credit policy was rejected, in a lot of ways due to its severity, don’t be surprised for this subject to be revisited in the future, perhaps in a more palatable form, especially with a huge coronavirus led budget deficit requiring repair.

But for now let’s celebrate this news for what it is – a positive start to the new year.


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