Investments, Tax

Indirect effects of franking credit plan also critical

SMSF, trustees, franking credits, AMP Capital

The ban on franking credit refunds will have an indirect impact on the Australian equities market and SMSF trustee investors.

A large financial services organisation has cautioned retirees, including SMSF trustees, to be mindful of the indirect effect Labor’s proposed imputation credit policy will have on the Australian equities market when formulating a strategy to deal with it.

According to AMP Capital, the indirect impact of Labor’s policy to strip franking credit refunds from some investors could have a wider impact on the domestic share market that may be just as significant as the immediate loss of income and greater exposure to market volatility regarded as the most obvious result of the change.

The investment manager pointed out Australian companies currently pay higher dividends than their global counterparts in part due to the franking credit system, but this may no longer be the case if Labor wins the federal election and introduces its proposed policy.

“If access to credits were materially restricted or removed, companies may decide to distribute lower dividends and retain more earnings for reinvestment,” AMP Capital portfolio manager Dermot Ryan said.

“Not only would this reduce the relevance of Australian shares to retirees’ investment strategies, it could also produce a material change in corporate governance, company performance and share price volatility.

“If it became clear that access to franking credits was to be restricted, there would be short-term pressure on companies to increase their dividends or engage in off-market share buy-backs to flush out as many credits as possible.”

Further, the Ryan noted this could mean some Australian companies could issue a large dividend and raise capital though a share issue in the same year.

While not suggesting Labor’s policy would lead to the total abolition of imputation credits, he did warn Australian share prices would suffer a dip if this scenario did eventuate such is the sensitivity to the current franking credit framework.

“Evidence from the premium at which dual-listed stocks in Australia trade relative to their offshore listing (whose shareholders can’t access franking credits) suggests for some of these large dual-listed stocks a decline of 15 per cent would be possible,” Ryan said.

In the short term, the organisation advised pre-retirees to reassess their retirement goals and amend their strategies to allow them to save more money before leaving the workforce. It also recommended SMSF trustees revisit their fund portfolio weightings with a view to placing less emphasis on allocations to domestic equities.

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