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Why franking fears, dividends may leave some investors worse off

Glenn Freeman  |  05 Jun 2019Text size  Decrease  Increase  |  
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Some investors could be worse off if they acted early on fears about Labor's franking credit policy, says super industry expert Phil La Greca.

Presumptions about the federal election result in May were widespread. Newspoll, YouGov/Galaxy, Ipsos and ReachTEL polls all tipped Labor to beat the Liberal/National Coalition by 51 seats to 49 on a two-party preferred basis.

Ultimately, the Liberal National Coalition scooped 77 seats versus just 68 to Labor – a surprising result that is a cautionary tale for voters and investors alike.

"Plan for it, but don't necessarily act before you really have to is the real lesson of it," says Phil La Greca, executive manager of SMSF technical and strategic services, Super Concepts.

Morningstar senior banking analyst David Ellis similarly warned investors ahead of the election to first wait for the result and the possibility the surplus franking proposal would be watered down in the Senate. 

Decisions made at a corporate level ahead of the election may also end up having unforeseen consequences for shareholders.

Westpac Bank (ASX: WBC) announced in March its plan to bring forward its interim dividend payment by nine days, to 24 June – a third dividend within the same financial year alongside the interim dividend paid last July and a full year dividend paid in December.

Some within the industry speculated this was spurred by a potential change in franking rules – a central part of Labor's ultimately unsuccessful policy strategy – including Australian Foundation Investment Company chief executive Mark Freeman.

Mining company Fortescue (ASX: FMG) also announced a big dividend payment during its interim results in February, as did travel agency business Flight Centre (ASX: FLT).

Super Concepts' La Greca says while companies are making these business decisions on the expectations of adverse policy implications, the full ramifications for end-investors aren't always considered.

"If you ended up with an extra dividend payment in your tax year, it could have some detrimental implications, such as maybe crossing some tax thresholds which can do all sorts of things," La Greca says.

"For instance, it could change eligibility for the aged pension, which could mean you lose your healthcare card – that's based on taxable income."

Such risks aren't exclusively presented by elections.

"We've seen it before. In 2016, the original budget proposal about non-concessional super contributions was going to be a $500,000 lifetime limit. But by the time we got past the budget, during the election it was changed to $100,000 and then we'll look at your super," he says.

"People who might've thought the [initial policy] was going to be in play might've held off making contributions, and then suddenly the new rules come in and they've lost an opportunity."

Dreams versus reality

The cautionary lesson for investors here is in how individuals should react to proposed announcements about rule changes, versus actual changes.

"And part of it also is that many people don't really have a full grasp of the parliamentary process.

"It's been a long time since we've had a government that's controlled both houses of parliament, so the potential for amendments or tweaking is pretty definite on anything that is even slightly controversial," La Greca says.

He believes not only did people take the election result for granted, they also overlooked the likelihood that the final superannuation or franking credit policy introduced would be substantially different to the draft proposals.

It's too soon to gauge how many people might have been affected either by higher dividend payments ahead of an expected Labor election win, or from making other changes based on potential changes.

"We might start to see the June 2019 assets information from the ATO in 2020…including whether exposure to Australian equities came down – that would give us an indication that maybe people did move," La Greca says.

"It will also be interesting to see what we get from APRA, if they have any data coming out post-June showing how many people moved money to industry super funds from SMSFs.

"We might see some rollover money from SMSFs heading back to APRA-regulated funds…there was a lot of talk about these sorts of actions, but it'll be hard to see immediately."

The potential for consumer complaints about financial advice relating to making changes ahead of the election to may be a further consequence, La Greca says.

"Because if someone advised clients to do this, and the client acted on that, if they're notionally worse off if they shut down an SMSF, or changed asset mix, they may have a case to argue."

is senior editor for Morningstar Australia

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