Franking woes for small caps
There have been several articles published on the effect of the cut in company tax rates on dividends paid by large companies (see The great franking credits rip-off), but as I detail below, the changes can/will also adversely affect small companies, and this impact has to my knowledge received zero coverage.
My wife and I own and operate a small company, and over the years we have accumulated retained earnings and a substantial franking account balance. We have both semi-retired and we're steadily reducing the company balance through dividend payments and transferring the funds into our SMSF.
What concerns me is that the franking account balance has been built on the 30% tax payment, and the retained earnings obviously correspondingly represent 70% of the total retained profits before tax. So, as dividends get drawn, eventually the company balance zeroes out. However, after the change in the tax rate, the franking credit will be calculated at 28.5% and hence when the retained profits are finally exhausted, there will be 1.5% of franking credits left which will be 'locked' or unusable.
Having a changeover period won't help because drawing out a large dividend amount will have dire tax consequences.
Also, to maintain the same drawdown rate on the franking credit balance requires an upward adjustment of the dividends paid which in turn increases the tax payable by almost 10% (on a dividend of around $70,000).
Given the recent concerns over the possible future abandonment of franking credits altogether these may be small matters, but they are individually significant, and as there may be a large number of small companies similarly affected, the overall impact on this sector will be considerable.
A sensible solution to rate movements
Robert Gottliebsen supports short-term bank deposits with a proportion of his cash (see We know what you’re thinking and Preparing for a storm). He also believes the next interest move will be up, although not in the immediate future. Currently the "at call" deposits at online banks (such as UBank) offer a better return than their one year deposits. If the eventual move in rates is up, then this would seem a more sensible and liquid arrangement. And thanks for the good Sydney seminar.
Warnings for unlisted property trust
I attended your conference this week in Sydney and found it to be very informative. However, a note in regards to unlisted property trusts (see article).
I have been in an Australian Unity Retail fund for many years and decided to close it this year. I contacted them four months ago and was told I could withdraw each quarter. When I tried to do so, I received only 10% of my investment back as capital. I asked why and they just sent a copy of the withdrawal form which says only $1 million can be withdrawn per quarter (out of the $320 million fund). This may mean I have to submit a form every quarter for years to get 10% each time . It could be a long time before I get my capital back. Imagine if there is a run on property (which I wouldn't think is happening now).
There should be a strong warning to would-be investors even with a large fund such as Australian Unity (which was given a favourable mention at the conference).
Choosing ETFs over managed funds
We are continually told via print that for active funds, management fees are 1-2% with a 20-25% performance fee on top of that if they outperform an index reference, with the lowest hurdle the manager can find and that investors would be willing to stomach.
Enough is enough. How would we feel, if on the successful outcome of a project, the manager asked for another 25% of the value of the project? The other side of the coin is this: the project has had a few difficulties, basically because we weren't as good at doing what we said we could do, but hey, pay us for the job that we did anyway! Yeah, right!
Basically, we are greedy at heart and think that paying someone more money will encourage them to go the extra mile. It's a bit like stock options to encourage management to outperform. Realistically, we are paying more and more money for the same performance and the presence of out-performance is more likely to be as a result of serendipity than anything else. The fund manager takes an outsize fee from such "serendipity". Until there is some accountability evident in the actively managed fund space, exchange-traded funds and index funds look to be the way forward (see article).
Taking a cue from New Zealand
It is my understanding that our neighbours in New Zealand have a 15% GST , a top marginal tax rate of 33% , are about to go back into surplus as a country and have also lifted the official cash rate over there.
Do we know whether Treasury in Australia has ever done modelling on such a scenario here? What a wonderful incentive to work that would produce and I dare say would dramatically reduce the number of people trying to "minimize" their tax position.
The government may even collect more tax which I understand has happened in other countries when the tax rate drops.
I do not know the extent of the "coverage " of the New Zealand GST but you would assume it covers food. Obviously the states would need to sign off but that really is only detail in carving up the "pie ".
Are Seniors Health Cards unfair?
I have just retired with several million dollars in my SMSF. I won't be entitled to the Health Care Card as my husband is still working. However, if that were not the case, I would think that it would be outrageous that the taxpayer should provide me with those benefits. I have several friends who retired early who have the Seniors Health Care Card. They have even more in their super funds than I do and they travel business class overseas every year. I was disappointed to hear that their benefits would be grandfathered. This seems very unfair. I think that the budget should not have grandfathered this benefit, and then more support could have been given to the much more deserving unemployed. Incidentally, I am a long-standing Liberal voter who ran my own business.