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Cuffelinks Firstlinks Edition 302

  •   19 April 2019
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(Publishing early this week as many people head off tomorrow for Easter).

One week in, superannuation is already a major election issue, and it ramped up yesterday. On the surface, statements by both leaders were reassuring. Within hours of each other, the major parties made commitments not to change superannuation. Scott Morrison said,

"I can say, probably more than anyone else who's had experience in this area of policy in government, there is no need to increase taxes on superannuation. I have the background to be able to absolutely give that commitment."

That's true, he does have the experience, including promising stability in superannuation in February 2016 before making major changes in the 2016 Budget, and justifying it directly to me.

Bill Shorten reassured with: "We have no plans to increase taxes on superannuation." What about the reduction in Division 293 threshold to $200,000 (where tax on contributions rises from 15% to 30%), the reduction in non-concessional cap to $75,000 and the loss of franking refunds?

There is no way back for Labor on the franking credit proposal as part of their election platform, although they must realise it is costing thousands of votes. Bill Shorten committed to the policy using language anyone could understand:

"If you are getting a tax credit when you haven’t paid any income tax, this is a gift ... It is now costing our nation over $6 billion a year, and pretty soon it will cost $8 billion. If all this talk of billions is too much, perhaps think of it in the following way. Two minutes’ worth of the gift, the money that flows out of this one loophole. Two minutes out of 365 days could pay for someone’s knee replacement surgery. Ten minutes worth of the gift is enough to employ a nurse full time for a year. In one hour this loophole alone could pay for a hospital bed for a whole year.”

Comment on our articles or use Have Your Say to contribute to the policy debate.

Of course, there are hurdles for the franking policy, such as Labor winning the election and Senate opposition from parties such as the Centre Alliance (the old Nick Xenophon Party). For those with SMSFs in pension phase who do not qualify for the pensioner exemption and whose portfolios are dominated by fully-franked shares, it's not an easy time to replace the income. There's little joy in term deposits meaning credit or equity risk is needed to a generate income.

Managing the loss of franking credits

The most obvious way to adjust a portfolio is to invest in assets which do not rely on franking. Among the Australian banks, for example, Macquarie has a lower dividend which is only 45% franked, and is more of a growth stock. Recent analysis by SuperRatings shows institutional MySuper funds allocate far more to global equities, alternatives and fixed interest than do SMSFs on average (in table below, NFP = Not For Profit and RMT = Retail Master Trust).

 

Source: SuperRatings AIST Fee and Performance Analysis, 10 April 2019.


Trustees should consider the total return on their funds, not only the income, and an SMSF holding the major banks, Telstra and Woolies is unlikely to perform the best over the long term.

For SMSF trustees who want to keep their investments in familiar Australian companies, there may be an alternative. Matthew Collins does the numbers on the 'direct investment' offers of industry funds, and we offer thoughts on how SMSFs and the wealth industry might respond.

Investors making changes such as these will ensure the $57 billion savings estimated by Treasury over a decade will not eventuate. Franking credits will be increasingly held by people who can use them, including large SMSFs, public funds and even charities (Treasury data shows 75 charities receive franking credits of over $1 million, worth almost $1 billion).

Lots of great Easter reading

What else is in this edition? Kate Howitt checks three key risks facing banks, their 'too big to fail' behaviour and their future as investments, while Gemma Dale makes a great point for SMSF trustees who maintain inactive public funds to access cheap insurance.

Joe Magyer shares his unusual 'fascination' investing theory which focusses on developing specific expertise, and Daniel Fitzgerald provides some useful data for investors looking for defensive assets that tap into Asian growth potential. Real assets have been performing well.

Adam Grotzinger gives some soothing insights for those looking for new sources of fixed income but worrying about corporate debt credit standards, while Don Hoang and Ilan Israelstam point to the value of thematic investing with easy access on the ASX.

This week's short White Paper from MFS Investments reviews why the final quarter of 2018 was so bad for equity markets, and whether things have really changed in 2019.

Vale Peter Smedley

Peter Smedley died of cancer at age 76 last week. There is not enough space here to go through all his achievements, but his biggest in business was the 1994 acquisition by Colonial of the State Bank of New South Wales (including what became Colonial First State). I was Deputy Treasurer of the bank at the time. As documented in my bookNaked Among Cannibals, Smedley paid barely $200 million for the bank in a bid process that excluded the four major banks. Then he sold the Colonial Group to CBA for $8 billion in 2000. It was a terrible waste of NSW taxpayer money but a brilliant deal by Smedley for Colonial shareholders and himself.

Graham Hand, Managing Editor

 

For a PDF version of this week’s newsletter articles, click here.

 


 


 

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