Implications of Labor’s Proposed Policies: Property, Investment Property, Negative Gearing, Franking Credits and Other Issues – Part 2

In part one on this topic we looked at the polices that Labor is likely to take to the Federal Election in 2019. In this article we look at the potential effect of these policies on the economy and what you should be considering regarding your own investment portfolio.

Confidence and Spending

Labor propose lowering taxes for low to middle earners, but will increase taxes for high income earners. That could provide a boost to consumer spending (positive for retailers), however on the flipside, higher taxes for the higher income earners is typically a drag on growth.

The greatest impact would be on already weakening property prices. If house prices continue to fall, and the proposed reforms are net negative for house prices, that too would weigh on confidence, spending, and ultimately economic growth in Australia.

Taking stock

Depending on individual circumstances, one or more of Labor’s proposed policies may dent financial plans. While it is worthwhile taking stock now, anyone contemplating changes should note that even if Labor wins, the final policy(s) might be modified.

Just for the record, 8 months can be a very time in politics and we should not completely discount the Liberals. We saw the polls get it wrong with BREXIT and President Trump being elected. Having said that, considering the implications of a new style of government is always prudent.

What about my portfolio?

We have had some clients ask what they should do about the potential impact of these changes, here are a few points on that:

1. Firstly, and most importantly, when it comes to your portfolio don’t get emotional – it will not help. The emotion over this issue is unprecedented. So much as mention the removal of cash refunds in polite company and prepare yourself for an hour’s worth of indignant lecturing about how unfair it is;
2. It may never happen. Labor may not win the next election;
3. Even if Labor does win, they may have to water down the somewhat unforgiving stance they have taken so far. They can afford to play tough right up until they lose the votes of 660,000 SMSF superannuants. If they need them, this policy will be reviewed and may even be forgotten. Forgiving it might even win them votes they weren’t going to get, such will be the relief;
4. Even if Labor does win and pushes ahead with an uncompromised policy on this issue, they still have to get it legislated. If there is a hung parliament, even if there isn’t, they may still struggle to achieve it;
5. Even if Labor does win and get the changes legislated, the current intention is that it would be introduced from June 2020 onwards. In which case, you still have the next few years to collect franking credits and have them refunded (depending on whether Labor changes the timetable). That 22-month window of opportunity may boost stocks with fully franked dividends, while you can still utilise the imputation credits. Companies will have this small window of opportunity to empty any bloated franking accounts through share buybacks, with a large dividend component and/or through special dividends with franking attached. It may just be the case that the 22 months before June 2020 end up being a super bumper year of franking giveaways by corporate Australia. So, don’t jump out of the big fully franked high yield stocks yet;
6. Don’t get too concerned about the “whole market” turning its back on the high yielding fully franked stocks, like the banks and Telstra. The section of the population that won’t be able to utilise franking credits, and may desert such stocks is the minority in a zero-tax environment with less than $1.6million in superannuation. The international institutions that hold up to 40% of many stocks will not be affected at all. They never got the franking anyway – they won’t be selling anything because of the change. It is not positive for the stocks involved, but it is not universal, and the adjustment will not be made until the legislation passes and even then, probably not until it comes into effect. In other words, the bank sector will not be dominated by this issue, there are plenty of other sentimental and fundamental issues that will overwhelm this one;
7. Predictable recommendations – For those that do get caught by this change, then some advisers will look to replace the lost income with some other return. Hence the predictable recommendation to buy stocks that do not pay franking credits. These include real estate investment trusts, infrastructure stocks, or global equities. In the end, there is no one answer, and you will have to choose between a low-risk yield or a higher risk investment with a focus shift from income to capital. This will involve a focus on share price growth rather than income and franking, and that will scare many retiree investors who pay little attention to share prices;
8. Watch out for predators with fancy new products – Beware predators creating products tailored to your insecurity and anger, and marketed as a solution to the loss of franking credits. There is nothing for nothing in this world. Someone will come up with a product to fill the gap, while they market something that may appear to meet that want or need. This is a huge marketing opportunity for product creation. Beware someone promising a franking substitute while they have their other hand in your back pocket;
   
9. Property – Some investors might decide to abandon equities and to look at property. They are very different investments. You don’t have to mend the toilet at BHP or worry about whether your tenant is going to trash the place. You can sell shares on the click of a mouse but property is illiquid. Ultimately, your choice though;
10. Moving money out of super is not the answer – Super still offers the most tax effective structure for your investments, irrespective of how annoyed we might become. Don’t throw the baby out with the bath water;
11. Some margin loans will no longer fund themselves – Margin loans will become less popular for those people wanting to use franking credits to pay the interest; and finally;
12. If it’s gone it’s gone – don’t blow the nest egg trying to get it back – The main point to take on board is that if the franking goes, it’s gone. If you need to replace it you will need to take more risk, otherwise you can keep a lower-risk profile in something that has an acceptable yield. Those investments might still include the banks, Telstra and other high yielding stocks, even if you can’t get the franking back. Better you accept lower returns than you blow your capital trying to get back what has been taken away.

What can you do about it?

The best chance to stop this is before the next election. If the number of disenchanted voters swells, there’s a possibility that these changes will be wound back or scrapped altogether.

You can get in touch with your local member of parliament and make your voice heard. What have you got to lose? The one thing that politicians like more than free travel, is being re-elected.

In conclusion

We have dealt with many changes in the past and we will continue to adjust to any changes that will occur in the future. We don’t like change and that’s OK – but getting overly annoyed won’t help.

We will adapt and carry on – just like we did last year, just like we will do next year.

If you have any further enquiries, please don’t hesitate to contact us on (08) 9227 6300 or clientservices@ww2.austasiagroup.com