AFR: Labor’s ironic franking sugar hit
Shadow treasurer Chris Bowen will no doubt see plenty of irony in the fact that fund managers and self-managed super trustees are about to get a handy special dividend sugar hit from the Labor policy they hate.
BKI Investment Company became the latest listed investment company to try to get ahead of Labor’s plan to get rid of cash refunds for unused franking credits, declaring a special interim dividend on Wednesday to soak up some of the LIC’s excess franking credits.
Three LICs in the Australian Foundation Investment Company stable have also declared special dividends in the last week.
Federal Shadow Treasurer Chris Bowen will find some irony in the special dividend sugar hit markets look set to enjoy. Jessica Hromas
BKI portfolio managers Tom Millner and Will Culbert say they’ve been taken aback by the level of angst around the franking issue, both from their own investors and large companies with big franking credit balances.
They expect at least some of the boards of those businesses will join the LICs in using some of those excess franking credits in the coming months via special dividends.
“There’s just a level of uncertainty about where the Labor party is going to land and it may just be prudent for companies to address that,” Millner says.
BHP is already locked into a $5.2 billion special dividend to be paid on January 30 following the sale of its US shale assets. Other special dividend candidates with big franking balances including Woolworths (which could pass the $1.7 billon from its petrol business sale back to investors) and Commonwealth Bank (which will reap billions from the sale of its global asset management business).
Retailers Nick Scali and Premier Investments, and miner Oz Minerals, are other candidates that have been mentioned in dispatches.
This possible sugar hit will add to what has been a big year in capital returns.
Don Hamson, managing director of Plato Investment Management, says dividends increased 8 per cent in dollar terms in 2018. Michele Mossop
Don Hamson, managing director of Plato Investment Management, says dividends increased 8 per cent in dollar terms in 2018.
While the market ructions in the December quarter weighed on the returns of many fund managers, Plato’s Australian Shares Income Fund had a record year for income distributions, with gross income distributions – cash plus franking credits after fees – in excess of 12 per cent.
That’s well above the longer-term average of 9 per cent, and Hamson sees the figure hitting at least 14 per cent for the 2018-19 financial year, given BHP’s monster payout.
If the special dividends flow – and Hamson is also confident they will – then distributions will climb again.
Still, Hamson is no fan of the Labor proposal. He says around 10 per cent of his investor base would be affected, but the best case study he has to argue against the proposal is his late mother, who passed away last year.
Her annual income of $30,000 was high enough to mean she didn’t qualify for the pension, but not so high that she could afford the $8000 hit that Hamson estimates she would have faced under the Labor policy.
“She would have lost 28 per cent of her income, and she wasn’t a wealthy woman,” Hamson says.
He also points out that the case study shows the policy may hit women harder than men, given they tend to live longer.
Hamson doesn’t expect Labor to back away from the policy – a fair bet given Bowen’s declaration that Labor would see victory in the federal poll as giving it a mandate for its tax changes.
But he’s more confident that cross bench senators will oppose the changes given the level of anger, particularly among older voters.
“A lot of the cross bench senators understand this now. This is a pretty contentious issue.”
But Hamson also suggests a middle ground might be possible in the form of a cap on the amount of refunds that an individual could claim. He suggests a $10,000 or $15,000 limit might go some way to cooling the concern around the policy.
“If people begrudge that for someone like my mother, then they need to get a life. That makes a huge difference for these people.”
Millner and Culbert believe the cap would need to be higher than that, but they also see a Labor backdown as unlikely.
The Coalition isn’t going to let the issue fade. On Wednesday, Liberal MP Tim Wilson announced the House of Representatives Standing Committee on Economics will hold another round of public hearings into the Labor policy next month.
The hearings in Merimbula, Bondi and Chatswood will take the number of public sessions held to 11, with further sessions almost certain.
The inquiry is starting to look like Bob Dylan’s Never Ending Tour, which would share a similar grey-haired audience.
This article was originally posted on the Australian Financial Review.