Suddenly the superannuation system is under attack on all fronts. But it took Bruce Teele -- the legendary executive chairman of AFIC, the nation’s biggest listed investment company -- to highlight how the government is quietly choking a mainstay of Australia’s investment income.
Franked income -- the tax efficient income investors (especially retirees) depend upon from Australian listed companies -- is being attacked from the inside. The system, which is seen as one of the outstanding successes within Australia’s unique superannuation system, is shrinking.
Teele explains the franking system is already under attack as Australian manufacturing moves offshore while at the same time offshore groups -- often pension funds -- move to acquire locally-listed companies.
But what has inflamed the broker, who led Melbourne’s JB Were for many years, is that the government is not just letting it happen but undermining the system from within: "We get one levy after another and every time the action is bypassing the franking tax system, with each move the system is weakened.”
Teele explains the exclusion of both the mining tax (MRRT) and the carbon tax from the franking credit system is hard evidence the government is diluting the franking regime: " It’s not a direct assault, that’s why it’s been under the radar, I’d call it a ‘covert’ move,” he suggests.
With the government actively downgrading the franking system, Teele is worried a pending acceleration of takeover action on the market fuelled by excess liquidity overseas will only worsen this problem.
There are two distinct fears:
1. If locally listed ASX companies are acquired by offshore groups and taken off the market, the investment option simply disappears along with the option of exploiting franking credits.
2. Or if a locally listed company progressively moves its operations offshore its Australian profit-related tax reduces, as does the level of franking advantage available to investors.
In running a $4.27 billion listed investment company (as opposed to a managed fund) Teele knows more than most the negative effect of a shrinking franking credit system. With AFIC expressly mandated to focus on quality stocks offering franking dividends, he says the basket of Australian companies he can invest in has shrunk from more than 200 to just 74.
But the process is relentless: Only a few days ago steelmaker Arrium received a takeover offer from a consortium including the Korean Pension Fund. Meanwhile, AFIC itself appeared as a reluctant seller into the takeover of the Hastings Diversified Utilities group which is being acquired by interests recently connected with Petronas of Malaysia.