Welcome to Firstlinks Edition 307
Graham Hand
How good are franking credits? They're the Promise of Australia. Little miracles for quiet Australians. If you have a go, you get a refund. If you put in, you get to take out, and you keep more of what you earn. It's a fair go for those who have a go. Thank you, friends.
In his 'I believe in miracles' speech on Saturday night, the Prime Minister's simple aspiration for Australians delivered a strong retirement message:
"To start a family, to buy a home, to work hard and provide the best you can for your kids. To save (for) your retirement and ensure when you're in retirement, that you can enjoy it because you've worked hard for it."
Franking credits played a major role in the Coalition victory. Swings against Labor were up to 15% in polling booths where over 15% of voters were over 60. Christopher Pyne told the ABC's Q&A: "If there was one policy which cost Labor the election, it was the retiree tax."
To be clear, Cuffelinks did not explicitly campaign against the franking change. We provided a forum to explain the implications, and even The Australian Financial Review highlighted our coverage. Judith Fox, Chief Executive of the Australian Shareholders Association, told their National Conference this week that Cuffelinks carried the best explanations on franking.
During my presentation at the Conference, the questions on franking continued, and Anthony Albanese's response on Radio 5AA on Monday left the door open on the policy:
"But quite clearly one of the issues I think that was very difficult for us was that the measures that we were proposing about the dividend issue impacted on people’s hip pockets, and some of those, of course, weren’t very wealthy people. They were people for whom a small cheque was what they paid their rates with or their car rego, or other essentials in life when it came in, so that clearly had an impact for us.
Clearly the amount of money that is going out there is the reason why we were proposing that $6 billion is unaffordable in terms of the Budget to keep growing into the future, but clearly those issues are going to have to be looked at by the Government itself in my view, down the track."
Bill Shorten unsuccessfully played on the intergenerational divide, and while Scott Morrison has promised no changes to superannuation (without specifying a time frame), it is wishful thinking to believe super rules will survive multiple terms of different governments. Politics is ultimately a numbers game, and despite the population ageing, younger voters have the momentum, as shown below. KPMG Tax Partner, Damian Ryan, wrote on Monday:
“As the Australian population ages, and as more shares are held by retired Australian individuals and superannuation funds with a significant proportion of members in pension phase, a significant part of the corporate tax base is refunded, thereby putting a strain on the country’s tax base. Assuming that the current situation of refundable franking credits continues, then Australia will continue to refund part of its corporate tax base.
The other alternatives are to accept the reduced tax base and correct spending accordingly, or to revisit the tax base, including consumption taxes, which is just as politically difficult.”
Population levels by generation, 2016 and 2019 changes
Research by SBS and Roy Morgan asked people to nominate which generation receives the best deal from the government. Ralph Ashton, Executive Director of the Australian Futures Project, said:
“This new poll shows just how disconnected the political parties are from young Australians. A majority of Australians of all ages believe that the benefits flowing from government have been disproportionately captured by one generation, the Baby Boomers.”
The largest group of Boomers (31%) agreed that they have the best deal from the government. A dominant 72% of Millennials (Gen Y) say Boomers have it best.
In fact, it is appropriate to ask 'How good are franking credits?' in another way. Grossing up a return by say 1.5% is meaningful, but it should not dominate the decision on good asset allocation. A portfolio dominated by Australian banks might produce a good income but focus should be on the total return from a diversified portfolio. Discuss under Have Your Say.
As we pull the curtain down on this issue, which has generated far more comments than any subject in our history, Tony Dillon asks whether the numbers ever justified the policy.
More important for the economy and property prices now is APRA's relaxation of the home loan serviceability rate from 7.25% to 6.25%. It significantly increases borrowing power for many.
A wide range of other fascinating subjects ...
We continue our popular Interview Series with Charles Dalziell from Orbis. This Series is uncovering a vast range of different ways to manage money, and the contrarian style is among the most challenging. Charles identifies several stocks which typify their investment style.
In considering the consequences of elections for investments, William J Adams describes how a policy once considered unacceptable and extreme can become mainstream. We should reflect on this when we claim that we will never again see some of Labor's policies.
Alex Denham has experienced client advice from many angles, and she argues that it's in the client's best interests for SMSF accountants and advisers to work together rather than compete.
Don Stammer has decades of experience watching markets, and he looks at factors to watch in considering whether a market dip signals a chance to buy or an opportunity to run.
For those who lament the favouritism by brokers towards large investors when allocating shares in IPOs, Raewyn Williams says it's better to save regularly on better execution and lower costs.
The traditional life patterns of work for 40 years and retire for 20 are behind us. Brett Jacksonsays we are forced to rethink what retirement means for money, lifestyle and investments.
The removal of the immediate threat to franking credits should provide a boost for hybrids, but they have not rallied anywhere near as much as bank shares this week. The NAB/nabtradereport below shows current prices and margins.
Graham Hand, Managing Editor
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