Time to look at your portfolio

Key take out: Labor’s plan to abolish franking credits could depress stocks that have attracted a premium because of their high franked dividends. 

The most likely thing to happen in Australia in the next few months is that the ALP wins the election. It will introduce its horrendous retirement and pensioner tax levied via by abolition of cash franking credits. 

This week I saw a glimmer of hope and I want you to help me to at least try to reverse what will be a terrible mistake — albeit we realise the odds are stacked against us.

Assuming we fail and the tax eventuates, then we all need to start thinking about our share portfolios. 

As a breed, politicians who reach cabinet or shadow cabinet usually know very little about superannuation.

Paul Keating was a notable exception.

In the last parliament, Kelly O’Dwyer proposed crazy superannuation rules which the back bench hammered into some sort of shape. Now in shadow cabinet, I don’t believe Chris Bowen as Shadow Treasurer fully understands the implications of his new tax. 

This week the Shadow Assistant Treasurer Andrew Leigh went on the radio in Canberra, ready to talk about any subject including the retirement and pensioners tax.  

My colleague Alan Kohler was scheduled to talk on the station after Andrew Leigh, so I listened to the conversation.

It was stunning. 

The interviewer asked Andrew how many people would be affected by the ALP tax. 

Leigh must have known the answer as did the announcer (at least one million) but Andrew Leigh claimed he didn’t know.

The announcer smelt blood so asked the question again and again and again and each time Leigh claimed he did not know. Leigh finally said he had been given the answer — it is four per cent of the total population including babies which  one million people.

That was the correct answer. 

Leigh is a good operator but he made himself look a goose — a clear sign of weakness. Imagine if the announcer did further homework and asked why should you allow people who belong to industry and big retail funds to have their cash franking credits in full and those who choose other managers to have them removed. 

I don’t believe either Chris Bowen or Andrew Leigh have any hope of providing a rational answer to that question. The fact that Andrew Leigh did not want to confirm the one million people to be savaged shows the  battle has much further to go. 

Now let’s go to the other side.  

During the week I happened to run into a Coalition cabinet minister and who sort of agreed that their campaign on negative gearing was not working because young people want to buy lower cost houses and don’t link lower house prices with a downturn in the economy. 

Accordingly, negative gearing is not going to work in the May election. 

But, to my surprise, like the rest of the cabinet that minister didn’t understand superannuation and didn’t understand that the ALP franking credit manoeuvre allowed big retail and industry funds to be exempt from the tax and other managers to be not exempt.

When I explained the craziness of the ALP tax to the minister there was a glint in that minister’s eye maybe. Just maybe…

The point is the Coalition didn’t understand what the ALP was proposing and therefore didn’t know how to debate it. But they do now. 

So I have a task for you. If you know a politician of any party but particularly a major party make sure you tell them about the discrimination between the industry/big retail funds and the rest of the managers. 

My guess is that they will be incredulous that this is the key feature of the ALP plan.  

The Coalition minister in question actually asked me how it all works and of course I explained that the big industry and retail funds have large numbers of employee members, and they use the tax paid by those members to give a free ride to the pensioners. It is totally illogical and wrong. 

On its own I don’t think superannuation will change the election – but it might make it a bit closer and it might force the ALP to make some amendments. 

However, if the ALP wins the election and introduces this tax we all should be aware that it is going to depress those stocks that have attracted a premium because of their high franked dividends. 

Six of our top ten ASX companies are banks and Telstra, that are in that category.

That means that the overall index is going to fall if Labor wins and it starts to introduce this tax. 

I want you to relook at your portfolio.  

There is a danger that many of you are still overloaded in bank stocks and indeed ANU Research shows that Australians invest in bank stocks to a far greater extent than any other major market. 

I realise many of you have large capital gains but if you are overloaded I would actually reduce my holdings in banks and pay the tax.

There are indications that the reversal of the boom's lending policies and advisory roles is going to be very expensive for banks and some of them may have to reduce their dividend.  Perhaps we are looking at a double blow.  

So, where do you go? Look around the lists for trusts or for stocks that are not as dependent on franking credits.

As you all know one of the stocks I chose was Transurban and I also have some non-retail property trusts. But there will be others as well.  

Finally, over the years, I have said to people who have a self-managed fund and did not want to pay big fees, that they could run a portfolio on a low fee basis by using Australian Foundation and Argo, plus property trusts and international equity funds. 

The big investment companies carry extra danger now because if their share-holders can’t claim franking credits, it is likely they will go to a discount to the asset backing and the asset backing will decline because of the market fall. 

All this is manageable longer term and hopefully we can get some sense out of the ALP but once politicians make a stand it is really hard to get them to change even though the policy might be ill conceived. 

But we are certainly need give it a red hot go and you can help if you know federal politicians of any party.