Imputation refund plan a wake-up call

The federal opposition’s proposal to end cash refunds for excess dividend imputation credits should ring alarm bells for SMSFs about the risks of home bias in investment portfolios.

Wealth management firm Charles Schwab Australia managing director John-Paul Drysdale said since the franking credits system was introduced in Australia in 1987 by the Labor government, it has become the go-to strategy for SMSFs and other investors and incentivised them to mostly invest in the Australian equity market while ignoring international equity investments.

“It’s introduced an element of risk in that strategy and it really comes back to the lack of current experience or competency for Australian advisers, and SMSF trustees themselves, and their current experience and competency in international equities,” Drysdale told selfmanagedsuper.

SuperGuard 360’s February SMSF performance indices showed that for the 12 months to 31 December 2017, the SG350 SMSF Reference Index returned 9.2 per cent, underperforming the 10.5 per cent achieved by the SG360 Default Index. The default index is based on MySuper products.

Drysdale agreed with SuperGuard 360’s assessment that SMSFs had underperformed in the past five years due to lower asset class weightings to growth assets, particularly international equities.

“If SMSFs are underperforming the basic industry offering, trustees and their advisers need to think about their strategies and have a look at what those professional fund managers are doing, and the biggest difference is the fact that there’s a much greater allocation to international equities,” he said.

He pointed to other challenges Australian investors face when attempting to invest overseas, including steep cost, lack of understanding of tax rules and exchange rate issues.

United States financial services firm Charles Schwab re-established its presence in Australia last year after acquiring Chicago-based stockbroker optionsXpress.

The firm offers Australian retail investors access to US stocks and exchange-traded funds, offshore mutual funds, options and futures, and fixed income, with the firm charging investors US$4.95 to execute a trade.

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