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In March last year – the Labor Party announced that on the 01 July 2019 if elected it would stop rebating excess franking credits to investors.

There is a good chance Labor may get into power at the next election. However, there is no guarantee it will occur and they will then have to get legislation through the upper house and that will be no mean feat. Needless to say hitting the panic button would be futile. Let’s be pragmatic and make sure that we are not adversely affected. So in March last year when it was announced Prime started to reduce the exposure in our recommended portfolios to franked income, which is really a continuation of a theme we have held for over the last 5 years – which is to encourage our investors into a wider asset allocation and consider options offshore and unfranked income streams.

Importantly as we look ahead –  some people still felt that they are going to see a reduction in their income. Whilst we hear these concerns like the old saying goes “You are not a tree….move.”

What I mean by this statement is that there are ways, avenues and opportunities that are available to offset this risk.

Franking credits – what are they, what are the proposed changes

Who’s impacted:

• Anyone who receives a refund for franking credits and doesn’t pay any tax e.g. Retirees
• The refund will no longer be paid under a Labor Government
• Impacts both Super Funds as well as personal income tax individuals

Who’s not

• Anyone who pays tax can still use franking credits to reduce their taxable income e.g. employed people
• People who receive the Age Pension (even $1) will not be impacted by the Franking Credit changes

2019 – Australia > a change in Federal Government?

The culmination of changing Australian retirement portfolio construction

All of this severely undermined the Australian franked income investment strategy.

A change in Federal Government will likely be the final catalyst to force domestic retirement investors to consider diversification of portfolio’s beyond Australian franked income.

Retirement portfolio construction under Labor will change completely

Portfolios will be constructed completely differently to today for several reasons:

• Australian franked dividends will be less valuable to retirement investors
• Housing will be less attractive as an asset class
• Capital growth will be more highly valued despite the reduction in CGT discount

Investors will have to work even harder in their portfolio construction
> set and forget is no longer viable

Australian old-economy, blue-chip equity will likely de-rate.

Investors will rapidly seek out alternatives to Australian shares and hybrid securities > international shares and small-cap shares will see ongoing, deserved growth  > mortgage funds and alternative income sources will proliferate.

But, all is not lost!

Be rational, be practical >

• Yes, franked income has provided tax-affected investors with a potential 1-2% greater return in their portfolios, and as income (valued by retirement investors for its perceived security), but…
• Australian financials ex-REIT’s (the largest dividend paying sector of the ASX200) returned +1.8% over 3 years 2016-17-18 against +21% for the ASX200 including dividends. The S&P500 returned +27%, the MSCI World returned +17%

Investors need to broaden their investment horizon, to incorporate not just income, but capital growth as well

You have options!

1. AMP Wholesale Australian Property Fund returned 9% in 2018
2. Latrobe 12-month term account is offering 5.7% annual income
3. Recently listed investment trusts such as  MCP Master Income Trust (MXT) is paying 5%+ annual income
4. Qualitas Real Estate Income (QRI) is targeting 8%
5. Consider spreading your wings; see this as an opportunity to diversify your portfolio

• Australia is < 2% of the world economy and less than <2% of the world share markets. We shouldn’t have all our eggs in one basket
• Unfranked Income and international equities will rise in importance
• We should be investing for capital growth, in the same way the rest of the world does

Let me be very clear, we are here to help and would love to in any way. While this might feel like a “kick in the teeth” now, I think a move away from a franked income as a strategy is a good thing. Understand that you do have options and there is a silver lining to this: moving away from franked income strategy in years ahead will be a far greater and more positive impact for portfolio returns than many people expect.

If you feel this article has been helpful please pass it on to others that you feel may be impacted and if you yourself would like to discuss your portfolio – I can be reached on the details below:

Michael Cooper

Email | +61 7 3010 8588

Listen to what one of our clients have to say. Here’s Brett & Megs sharing their positive experience with us:

To listen to a message from Michael, watch the video below:

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