Franking credit changes unlikely to hurt share prices
Labor's plan to scrap cash payments for excess franking credits is unlikely to dent share prices for fully franked stocks if the proposal becomes law in July, according to one Aussie fund manager.
Labor's plan to scrap cash payments for excess franking credits is unlikely to dent share prices if the proposal becomes law in July, according to one Aussie fund manager.
In an interview with Morningstar, Plato Investment Management managing director Don Hamson said while the market saw a small sell-off in the price of income securities around the time of the ALP announcement March 2018, prices have since strengthened and the new issue of income securities has continued, despite the uncertainty.
Hamson, who manages the firm's active income fund, says he doubts there will be a significant reduction in the prices of fully franked stocks because the majority of Australian investors will be unaffected by the proposal.
"Franking credits can still be used by most Australian investors – namely large APRA-regulated superannuant funds and individual investors paying higher tax," he says.
"For instance, only 10 per cent of our investors will be directly impacted by these changes."
Hamson adds that pension-phase SMSFs who switch their assets to APRA-regulated funds will also continue to receive franking benefits, although he is uncertain how many trustees will make the move.
According to the latest ATO figures, SMSFs held $697 billion in assets, with more than 1.1 million members at 30 June 2017.
The majority of SMSFs continued to be solely in the accumulation phase (53 per cent) with the remaining 47 per cent making pension payments to some of or all members.
Morningstar director of equity research Adam Fleck agrees the changes will likely have a minimal long-term impact on share prices.
Fleck says that even if proposal ultimately reduces local investor demand, it's a global world, and international investors may become more interested in Australian shares.
He adds that investors who continue to benefit from franking credits because of their tax-paying status could also potentially scoop up shares at a lower price.
Both Fleck and Hamson stressed that Labor's proposal still has a long way to go before becoming law and warned investors against acting ahead of it becoming enshrined in law.
Morningstar's senior banking analyst David Ellis says there is a possibility the proposal will be watered down in the Senate as it’s likely to be thwarted by conservative-leaning independents.
Ellis has cited global asset manager Macquarie Group, QBE Insurance and British holding company CYBG as three alternative investment ideas should Labor’s plan take effect.
Echoing calls from accountancy body CPA Australia, Hamson wants to see Labor compromise by placing a cap on the annual refund investors could receive at about $10,000. He argues this will deliver a more equitable outcome for lower income retirees.
If it wins next month's federal election, Labor has pledged to remove cash refunds of excess franking credits starting 1 July this year. Under this policy, franking credits would still be claimable as a tax deduction on income, but surplus credits won’t be refunded.