How imputation changes could hit retirees
Bill Shorten’s prospects of claiming The Lodge at the next Federal Election got a shot in the arm in recent weeks, and hence I thought it worthwhile focusing on how the ALP’s proposed imputation changes could hit retirees and change investing patterns.
We know access to imputation credits has seen Australian retirees holding a portfolio with considerable “home bias.” In a recent study entitled “What Dividend Imputation Means for Retirement Savers” authors Adam Butt, Gaurav Khemka and Geoff Warren from the ANU College of Business and Economics believe this is borne out with a weighting of three times domestic equities (46 per cent) to global equities (15 per cent).
The reason is that under imputation “Australian equities offer substantially higher returns for a retiree who can claim the full credits, but without a meaningful increase in overall risk.” However, under the proposed policy change imputation tax credits can only be offset against existing tax liabilities. And those retirees who have a relatively low tax rate are likely to be impacted by this policy given they can currently claim the full value of imputation credits as a tax refund.
According to Butt, Khemka and Warren “such a policy change would effectively reduce the returns that such retirees receive from investing in Australian equities by the amount of imputation credits, which average 1.3 per cent – 1.4 per cent per annum.” This is a significant number given other academic studies reveal the total average annual return from the Australian market since 1900 has been a little over 10 per cent.
The proposed changes to imputation would likely see typical retirees maintain a more balanced portfolio and our authors believe an allocation of 26 per cent domestic equities (from 46 per cent) and 33 per cent global equities (from 15 per cent) is a logical progression. Further, this would provide “less support to Australian companies via the investments they make.”