Political fever and franking credits

What would happen if Bill Shorten kept his promise on franking credits?

In his budget reply speech, Opposition Leader Bill Shorten said that cash franking credits are gifts that are "costing taxpayers nearly $6 billion for every year — and growing so fast that it will soon be more than we spend on public schools...it’s just not sustainable anymore”.

That is a strong statement from the ALP and spells out for the first time the real ALP agenda.

Chris Bowen’s plan on franking credits would still leave lots of people enjoying cash franking credits and this would greatly lessen the impact.

But the Bowen plan is not what his leader is promising.

If the Bill Shorten plan was actually carried out, it would mean that more than one million people who will receive cash franking credits under the Bowen plan — including members of retail and industry superannuation funds — would not receive them.

It would greatly shock a huge portion of the Australian population who, at this stage, don’t believe they will be affected because of the protection of industry and retail funds.

It would mean a massive selling of banks, Telstra and other high-yielding franking dividend stocks. It would reduce the level of the sharemarket considerably and force a great many more Australians onto the government pension.

It wasn’t until the budget reply speech that we saw clearly what the ALP thinks it is doing. Chris Bowen has declared that if you happen to be in a fund that has lots of wage earners, you can use the tax they pay to deliver you all the franking credits you are entitled to.

Moreover, superannuation funds with plenty of wage earners are preparing products that will enable those with self-managed and other retail superannuation assets that are in pension mode, to receive their franking credits in full.

Accordingly, in the superannuation movement, there is great hope that impact can be minimised. But watch that you are not caught by another trap.

Many years ago, when the technology didn’t allow the current flexibility of the superannuation funds, many people in retirement mode were moved by the retail funds into separate units that had specialised retirement portfolios.

That means that they are now not connected to the worker tax gravy train.

There are now feverish efforts being made to reorganise these funds and reconnect them to workers who pay tax. It may work but there are many hundreds of thousands of people who are reliant on the legal eagles to find a way to maintain their current returns.

If Bill Shorten insists that Chris Bowen carry out the policy that Shorten announced, then no one in the industry and retail funds and of course the self-managed funds, would be able to receive the cash franking credit and we would have a major horror story for the market.

In fairness to the Coalition, it wasn’t until last week that Bill Shorten clearly set out the ALP's policy, and it became clear that Chris Bowen is doing something quite different.

It's dangerous for a political party to head into an election announcing one thing and doing another, although they are comforted by the fact that few understand franking credits outside the retirement community and there is very little understanding of it within the Coalition.

But all sharemarket investors will be on the edge of their seats in this election campaign. And if you have friends who are in pension mode in some of the big retail funds, do alert them that this is a danger and ask them to check with their fund and carefully note the answers. 

Whether it is in Australia or the US, it is the prospect of lower interest rates and a free trade deal with China that are the biggest forces driving the market. And so this week there was nervousness about a China deal and shares fell.

And those lower interest rates in part rely on wages and inflation being restrained.

If the ALP wins the election there will be a major push for higher wages and if successful that in turn will increase pressure on interest rates.

But BHP showed over the weekend just how much scope there is for companies to reduce their costs given the advent of new technology.

BHP plans to reduce its WA white-collar workforce by some 700. The company has appointed Dianne Jurgens as its chief technology officer and Jonathon Price as chief technology officer and these are early fruits of the BHP investment in new technologies which replace middle ranking white collar labour.

That process is available to almost all large companies and, if they had that willingness to do it, to all governments. It is that process that is likely to keep the lid on wages well into the future unless of course the unions get completely out of hand and cause a short term blip.

In Australia, the market’s view was that the budget stimulus offered by the government was not sufficient to stop the pending lower Australian interest rates and the prospect of those rates – and certainly not higher rates – was higher auction real estate clearance rates both in Sydney and Melbourne and different places dwellings were priced above the reserve showing that buyers were around.

The momentum was not simply caused by the prospect of lower interest rates. A number of people have held back their houses from sale so the supply of real estate was restricted at the same time. It is clear that the banks are more relaxed in their lending approach than they were in the final months of 2018.

One of the reasons for this is suddenly that smaller banks and other lending institutions have jumped in and offered much greater lending on individual properties so that in some cases young borrowers are finding they can actually raise the amount of money required to buy the house.

There will be more twists in the tale and the auction clearance rally will be severely tested if the ALP wins the next election and introduces its negative gearing clamps.

Indeed the current set of buyers in the market may have included people who want to buy investment properties for negative gearing before the ALP measures come into play.