Franking credits - gone?

Discussion in 'Sharemarket News & Market Analysis' started by Alex McDonald, 13th Mar, 2018.

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  1. Nodrog

    Nodrog Well-Known Member

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  2. oddshapes

    oddshapes Well-Known Member

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    Nocookies


    Link to article stating Geoff Wilson will convert all of his LICs into trusts.

    In the comments section below the article, an interesting post was made by someone named Leigh which I've copied below:

    "There is another issue here that has not been discussed. An LIC can trade at a discount, or premium, to the Net Asset Value (NAV) of the LIC. However, an exchange traded trust (M Fund?) has a quoted price roughly equal to the NAV.

    So investors need to be aware that if they buy an LIC trading at a premium, then they are likely to lose that premium if it is converted to a trust. Conversely, if there are LICs currently trading at a discount to NAV, then they should appreciate in value if converted to a trust."

    If correct, just another thing to consider when purchasing LIC's before the election.
     
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  3. Snowball

    Snowball Well-Known Member

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    I’m not sure that’s true.

    From memory Forager funds created a listed investment trust (LIT) - code ASX:FOR.

    That trades at a small premium. It was around 10% premium a while back.
     
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  4. Ianvestor

    Ianvestor Well-Known Member

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    I agree with Snowball here, the discussion about LIC's maybe converting to a trust generally is referring to them becoming a LIT. Then it simply comes down to the market mood as to whether it trades at a premium or discount.

    Wilson actually got this very question at the Melbourne presentation and responded to this effect. Of course he is confident in his products so just gave his opinion that he would expect something like WAM to still trade at a premium. But that will be up to the market.

    I think we have already seen an example where AUF became EAF. i.e. going from LIC to LIT.

    My gut feel is that something like WAM might lose some of its premium if it became a LIT. This has nothing to do with it having to trade near NAV because it may be a LIT. I just have that opinion because the premium is already large, and all things being equal the changes to franking might lead to lower demand from some of their usual demographic of buyers in the medium term.

    LICs that are talking about potentially going to a trust structure are normally referring to the closed end LIT structure, as Forager are well known for (FOR).
     
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  5. Nodrog

    Nodrog Well-Known Member

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    Bit rusty here as I don’t follow Forager. From memory I think they converted from an ”Unlisted” Trust (not a LIC) to a “listed” trust (LIT)? It traded at a sizable premium immediately after the conversion. Existing unit holders would no doubt have been happy. So I think NTA premium / discount really comes back to investor’s view of the Mgr first and foremost as stated by @Snowball and @Ianvestor.

    However God knows how LICs vs LITs might be perceived by investors if franking credit refunds are abolished? In theory LITs would have a structural advantage over LICs but even that depends on the investor’s circumstance. SMSF reaction will be a biggie in all this. Given that, perhaps a LIT might be more appealing and hence command more of a premium / lesser discount? Interesting times ahead.

    You have to think when newer investors or those wanting simplicity read all this stuff any wonder traditional index ETFs must look appealing:D.
     
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  6. Snowball

    Snowball Well-Known Member

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    I think Wilson’s funds become a lot less appealing if there’s no franking refund, even if they convert to LITs.

    They’ll be paying out massive distributions that fluctuate wildly year to year, unless they start trying to time sells with the financial year, but that could affect performance.

    The whole reason they’re attractive is for the high relatively reliable dividend stream for retirees. If that disappears I expect the premium might too.

    Looking at FOR its on a yield of 14.8% because of the capital gains distributed. Performance doesn’t look good recently so payment will year will probably be way lower. Also capital is down 30% because of the monster distribution and poor performance.

    Given WAM is very active it’s probably fair to think this would occur with them also. Probably not ideal for the average silver hair holder (including me :D)
     
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  7. Redwing

    Redwing Well-Known Member

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    Older but still interesting article

    Dividend imputation myths that must be busted

    The first myth is that franking is an anachronism and should be removed as part of modernising Australia's tax structure.

    The reality is that franking's primary benefits, avoiding double taxation and removing the incentive for high levels of corporate debt, remain valid.

    Continues..
     
  8. oddshapes

    oddshapes Well-Known Member

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  9. oddshapes

    oddshapes Well-Known Member

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    A small article today about the value change to banks with the removal of franking credits
    Billions to be wiped from banks’ value by franking credit change
    -------------------------------------------------------------------------------------------------------------------------------
    A new report has warned that billions of dollars could be wiped from the value of the big four banks if Labor’s proposed franking credit change goes through.

    The report from Citigroup said that Australia’s big banks could face up to 13 per cent reduction in their target valuations if the change occurred.

    “Potential changes to dividend imputation and the removal of cash refunds from investors is likely to have a meaningful impact on bank shareholders.

    “Depending on the changes implemented, this could impact major bank valuations by up to 13 per cent.”

    Labor announced last year its plan to remove the concession that gives cash refunds for excess dividend imputation credits.

    In a statement made by Chris Bowen, the opposition party said that stopping this practice would help improve the Australian budget.

    “Closing down this concession will save the budget $11.4 billion over the forward estimates from 2018–19 and improve the budget bottom line by $59 billion over the medium term,” he said.

    However, the move has been met with criticism from various industry bodies, with the Citibank research being the latest.

    Citigroup’s research found that franking credits were responsible for a large proportion of the value of major banks.

    Under the research’s estimates Commonwealth Bank would see the biggest loss to its annual target share price, slipping from $72.05 to $63.84.

    Meanwhile NAB would see a $3.91 reduction from $31.12 to $27.21, with Westpac just behind with a slip from $29.87 to $26.18 and ANZ falling from $30.19 to $26.89.

    Citigroup warned that the policy change was a significant issue for the financial sector but said that banks should not fear a change of government in the next election due to Labor’s negative gearing policy.

    “Negative gearing as an investment strategy is likely to be relatively less compelling than it has been in the past.

    “Consequently, the impacts of changing government policy are expected to be somewhat muted.”
     
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  10. PandS

    PandS Well-Known Member

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  11. trinity168

    trinity168 Well-Known Member

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  12. PandS

    PandS Well-Known Member

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    a bit of scare tactics and fanciful stuff, business are value for their earning, present and future cash flow, franking credit got nothing to do with it. Banks business has absolutely no impact regarding franking credits rules, franking credit goes to shareholders not the business itself, the business paid their tax and they racked up franking credit for shareholders.

    Shareholder get the benefit of franking credit or not got nothing to do with banks as a business.

    with franking credit it let shareholders factor it in as part of their strategy for yield, without it bad luck find another strategy it not the end of the world

    Note franking credits still exist what they getting rid off is the refund component and I think it is fair enough.

    I am at the receiving end of it in my SMSF and I don't have an issue they getting rid of it. I know it is a hand out that some day it wont be there
     
    Last edited: 8th Feb, 2019
  13. Nodrog

    Nodrog Well-Known Member

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    Will you be changing your SMSF strategy?
     
  14. PandS

    PandS Well-Known Member

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    no not really, it just cream on top I don't based my strategy on franking credit refund
    I am aiming for capital growth so hopefully by the time I retire I have enough capital for living off dividend without franking credit refund.

    I know a lot of people will be upset because they missing out the refund but if you look at it objectively and don't get too emotional about it, it really is just a hand out. These people never pay tax in the first place, company pay tax they get the franking credits refund, it is unique in the world and it is unsustainable.

    that my opinion and some may not agree

    and if people really want they can invest in company that paid high yield un-franked then it equivalent to franking tax credit refund but that field is limited, and really people should never based their investment strategy based on generous hand out
     
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  15. Tony3008

    Tony3008 Well-Known Member

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    Back in 2015 it was more than $90. People who were sucked in by the franked dividend have seen 20% of their capital destroyed.
     
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  16. PKFFW

    PKFFW Well-Known Member

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    If you are not retired now I assume you are still earning an income and would therefore be very unlikely to have been receiving a refund of franking credits at this time.

    So how is it that you are "on the receiving end" of this policy as you claimed in #292?
     
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  17. PandS

    PandS Well-Known Member

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    My dividend franking credit exceed my contribution tax payment so I get a refund
     
    Last edited: 9th Feb, 2019
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  18. Nodrog

    Nodrog Well-Known Member

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    Yes fair point particularly in relation to SMSF but similar applies to personal employment.

    In Super accumulation mode 50% of FCs are used to offset 15% earnings, more FCs offset on compulsory / personal contributions then throw in a little international / other unfranked earnings then there’s bugger all if any franking credits left!

    Big difference when in Super pension mode.
     
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  19. PandS

    PandS Well-Known Member

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    say I get 40K dividend a year that mean I got roughly 17K franking credit
    because of my age I can only contribute max 25K, 15% tax on 25K is around $3750
    offset the 15% tax on 17K credit (or Norog put it 50% of 17K) - 3750 = refund
    nice little hand out wouldn't you say?
     
  20. Nodrog

    Nodrog Well-Known Member

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    I might be getting mixed up with another poster (geriatric memory syndrome) but I thought you invested in funds throwing off capital gains as well further soaking up franking credits?

    A retiree post 65 (not working) has no earnings and contributions to soak up franking credits.

    However I agree it is overly generous. But the sore point is many industry / retail funds are unaffected by Labor’s policy but SMSFs get hammered. Secondly SMSF retirees not in the wealthy category who planned their retirement based on nearly two decades of tax policy have had their planned cashflow decimated. No human capital left to reenter the workforce and unable to invest for the same income elsewhere taking into account SANF. Closing down the SMSF for Industry Fund for a future unknown outcome including possible much higher fees is not an automatic solution.

    Labour should consider a cap on franking credit refunds and / or a phased in period which would normally be the case for such a major change.
     

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