Wattle Partner’s welcomes the result of the Federal Election on the weekend. We had previously stressed the importance of not changing investment strategy based on proposed but not yet drafted legislation, given the potential for losses if the result was not as expected.
As a financial advisory firm that specialises in superannuation and SMSF’s we had serious concerns around the potential impact of removing franking credit refunds for a select group of investors, but more so the manner in which the proposed legislation intended to treat people in similar situations differently. We believe changes to franking credit refunds may occur at some stage in the future, but that this is more likely to be in the form of a cap on cash refunds, rather than an outright banning.
Whilst the individual policies proposed including changes to negative gearing, banning of franking credit refunds, reducing the capital gains tax discount and introducing a tax rate on family trusts may on their own have merit, we believe they further threatened what is already a slowing Australian economy. As outlined in the latest quarterly review, the combination of each of these proposals was having an impact on the residential property market in particular, as well as consumer spending as Australian’s prepared for the worst.
At first there have been three core beneficiaries of the election result; the banking sector, healthcare, hybrids and infrastructure. Most of the banks have rallied in excess of 5% in early trade, due to a combination of stockbrokers and SMSF investors re-entering the market and a more positive outlook for residential property with the spectre of negative gearing removed. Healthcare companies, in particular Ramsay, have rallied a similar account as the proposed cap on insurance premiums was avoided. The hybrid market, which delivers fully franked dividends of around 6% also rallied as mum and dad investors re-entered the market. Finally, infrastructure businesses, Boral for instance, has benefitted from the Coalitions mandate for an infrastructure spending boom across the country.
As always, these are only short-term movements, but continue to justify the recent adjustment of portfolios towards those defensive sectors poised to grow in a slowing Australian economy.
One of our major concerns during the election was the broad based assumption that Industry Union Fund’s would somehow be excluded from the franking refund policy, resulting in a huge in flow of capital.
Based on our research, along with the lack of drafted legislation, we believe this assumption was inappropriate and unlikely to eventuate. It ignored the impact of the actual increase in pensioners moving into these funds, the fact that refunds were banned for all people, not just those in SMSFs, and our expectation was that the proposed legislation would have been changed before being passed to avoid this fact. Industry funds were happy to let the assumption continue, without knowing themselves how it would be delivered.
Many people may not understand how industry funds actually work, in that your account is invested into a pooled structure, with both accumulation and pension investors. Your fees and franking credits reduce the tax of others as well as funding the growing financial advice arms of these businesses. The allocation of franking credits to your account is at the discretion of the trustee of each fund, if in any event the fund has excess franking credits at all.