This morning Bill Shorten revealed his latest attack on the retirement savings of Australia’s self funded pensioners, proposing an amendment to the dividends and input tax credit rules. The change would see the tax refund normally returned to superannuation funds slipped unscrupulously into the coffers of a Labor government if elected.
Banks and corporations raise money by issuing Income Securities (technically floating rate preference shares, convertibles or notes), which then trade on the ASX. Such securities offer a quarterly return above the 90 day bank bill rate through distributions that have been already taxed at the company tax rate (typically 30%).
For example – a hypothetical fully franked distribution of $100 would carry with it a credit of $42.86 for tax paid. Super funds in pension mode paying no tax, and funds in accumulation phase paying 15% would receive a cash refund for this credit in excess of their respective tax rate.
The better than bank interest return from these securities coupled with the liquidity of ASX listing, low volatility and low risk has made them popular with self-managed superannuation funds.
Labors policy to cancel the tax credit would mean that from July 2019, super funds will receive a lower return from the same security, entirely changing the risk/return metric and investment thesis.
In our opinion, the listed securities price will need to be discounted for the lower yield in 2019. Upon the announcement, we have sold all the listed securities/hybrids we had exposure to, as we believe the market will start to price this risk well beforehand.
The fact that we were able to move quickly and fluidly is just another example of the benefits our clients receive from professional management under the individually managed account structure.
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