The Abolition of Franking Credit Rebates (Franking Credits)

With the next Federal Election a little over six months away, we thought it worthwhile discussing the possibility of seeing Labor's proposed abolition of franking credit rebates implemented. This discussion has become more relevant with Labor's odds firming and it becoming increasingly likely that Bill Shorten becomes our next Prime Minister; in fact, Sportsbet has Labor $1.30 odds on favourite to win the election compared to $3.20 for the Coalition.

We have discussed this in the past and suggested that members not get carried away with so much time before the election. Events can change the course of the election or the dividend plan could be watered down, so adjusting one's portfolio on this possibility seemed premature.

To rehash the contents of the plan, Labor proposes eliminating any cash rebates that can be claimed from franking credits; usually by low income-tax paying vehicles such as pension funds. Franking credits will still be claimable as a deduction against other income so the value of these will not be lost on all investors, but undoubtedly the largest group of Australians likely to be impacted are retirees. In fact, self-funded retirees would have to boost their savings by up to 9% to make up for the loss of income if this proposal is enacted according to new modelling done at the Australian National University.

This is a significant blow to those members reliant on the current rebate scheme and given the large number of members sitting on passive investments in high franking credit stocks such as the banks and Telstra (TLS) we felt it important to discuss this issue in more detail.

So, what can be done to combat the impending changes (in the absence of a turnaround in the election prospects)? The simple answer in our view is appropriate diversification. Retail investors have long been complacent as far as investing in the banks and TLS are concerned, mistaking the high gross dividend yield as a guarantee of returns. In reality, it doesn't matter whether a stock pays no dividend at all as long as the overall return (capital gains plus dividends) is good. Those members investing in low tax-paying vehicles and sitting on overweight bank or TLS positions are looking at a significant hit to returns and adjusting one's portfolio on this possibility makes complete sense especially when the tax position on selling long-term holds is minimal.

As far as what to do with the proceeds of selling down some of these high dividend paying stocks to appropriate levels, we would encourage members to look at Rivkin Smart Portfolios as an option for this. In recent times, as we have introduced new strategies (such as Momentum and Value), our weighting to high dividend paying investments has conveniently dropped, so these portfolios offer investments with high long-term returns without a reliance on dividends. If you would like to discuss how the Smart Portfolios work or how the changes to dividend imputation could affect you, feel free to call Rivkin on 1300 748 546 for a review of your portfolio.