Do retirees need to adjust their investment strategy when cash Imputation Credits end?

Labor has given Australians ample notice of their intention in government to end cash imputation payments to those who are unable to take advantage of a credit offset on their tax bill.

With Labor almost certain to win the upcoming federal election scheduled for May this year, now is a good time for those affected to think about how they will respond, if they do.

There is no need for the elderly to panic over the prospect, since it will not mean the end of the system of franking credits on company dividend payments introduced by a Hawke-Keating Labor government, but it is nevertheless certain to affect retiree psyche, and may motivate them to seek alternative arrangements.


Why Imputation Credits matter to the retired.

Franked dividends have proved a boon for retirees both with and without self-managed super-fund structures. Constant market oscillations, frequent general and company specific downturns, and occasional devastating crashes heighten the appeal of a stable dividend cash flow on which to live. Full franking transforms a mediocre dividend rate into a much more attractive return of 6-7% for some stocks. Such an income stream helps conserve capital, and thus extend the life of their lump sum.

The share-price of “blue-chip” shares paying fully franked dividends are usually much less volatile than more speculative shares. As a result, stop-loss selling may not be necessary when the share-price falls. .

It is long-term retirees, like myself, with small residual balances who are most likely to feel aggrieved with Labor’s proposal. For us cash annual franking credits are a welcome source of funding for big-ticket items. Pension adjustments would not compensate for this.

I am offended that because I no longer work and pay enough tax, I will be denied a valuable benefit from franking credits. After all I have already paid more than my fair share of income tax, and for much of my working life have pre-paid 15% contributions tax. Having been through the global financial crisis of 200-8 and lost about 40% of my superannuation capital, I have had to forfeit the contribution tax I had paid on this proportion of my savings.

Labor apologists tend to regard those with SMSFs as wealthy, and exploiting the concessional benefits of superannuation, when in reality most are not millionaires but simply saving what they can, to be as independent as possible of government assistance, when they can no longer work.

Those envious of how much some are able to put into their super-fund should take into account how quickly superannuation balances can fall when contributions cease, and retirees must live on what they have been able to save and invest. Most retirees become eligible for at least a part-pension within a few years of retirement, if they weren’t initially.

 

What is Labor’s perspective?

The Hawke-Keating government introduced franking tax credits on dividend payments to counter accusations that the taxation of shareholder dividend payments from companies that had already paid company tax on their profits, was double dipping. It has been an excellent innovation, but retirees who no longer paid tax missed out on receiving any benefit.

This anomaly was corrected in the years of the Howard-Costello administration when the mining boom gifted the government a succession of budget surpluses. They further advantaged retirees by exempting self-managed superfunds from having to pay tax on their earnings in the distribution phase.

When Labor came into office in 2007, revenue started to decline as the mining boom ended, and the global financial crisis brought additional funding demands. It became increasingly difficult for the government to raise the finances for its reformist policy agenda.

The Grattan Institute has been the source of advice to Labor, as to how the problem might be solved. Unfortunately for those who seek involvement in the management of their own savings, Labor is embracing suggestions they have made, to siphon off what they consider is excess to the needs of those with larger superannuation balances.

Labor regards the combination of tax-exempt status of investment income in retirement, with an entitlement to cash dividend franking credits, as an unfair anomaly. It proposes to provide some form of pension supplement for those seniors with few remaining assets, who will be disadvantaged as a result of the change.

How is the market likely to react?

 

Labor’s policy principally targets the earnings of self-managed superfunds, a not inconsiderable segment of the superannuation market, now about 30%. They are likely to lose billions of dollars of dividend income each year which will find its way into the Treasury coffers.

Logically many industrial companies will find alternative ways to reward their shareholders, such as company buy-back schemes, whilst many companies are likely to reduce their dividend pay-out ratio in favour of the re-investment of profits. With this will come a greater market turn-over as more retirees opt to realize capital gains in lieu of diminished dividend income.

Some Institutional superfunds have tapped into the need for retirees to have more say in how their money is invested although they would no doubt, much prefer sole control and higher fees. Whether this trend will attract more retirees to abandon their SMSF remains to be seen.

What should you do?

You should as always do your own research, seek professional advice from qualified financial advisers in whom you have confidence, and form your own opinions. For me it will be mostly a wait and see attitude.


 


 



Categories: Investment, Superannuation, Uncategorized

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