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How imputation changes could hit retirees

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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.”

What Dividend Imputation Means for Retirement Savers, Adam Butt, Gaurav Khemka and Geoff Warren

Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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3 Comments

  1. Hi David

    For some retirees converting Super funds into pension phase may not be attractive or necessary if the changes go ahead. Leaving funds in accumulation mode will enable the franking credits to be put to use – also when funds are in accumulation mode there is no need to conform to minimum annual drawdowns as required in pension phase. Another way to “preserve” the franking credits (for possible future use) is to form an investment company with a portfolio of shares paying franked dividends and not pay dividends out of the Investment company –
    ( provided you have other sources of funds to live on ) I’m sure a lot of Investors will work around the proposed changes if they eventuate. Also, there is nothing to say that Bill Shorten won’t make further changes if elected.

  2. You don’t mention the potential impact on the preferred investment structure for self funded retirees investing in managed funds via an SMSF. LIC’s versus Trust structures for investment fund holdings. The returns of the former are taxed and franked dividends passed on to investors. Investment Trusts on the other hand distribute returns to investors who are then responsible for the tax. Logically retirees will come to favour the latter over the former if, as is likely, Labor’s imputation changes come into effect next year.

    There are likely to be winners and losers among the fund management industry from the changes as self funded retirees adjust their portfolio of investment funds.

    • Thanks Lloyd for that. Distributable income from Trust structures includes any interest on the cash component in the portfolio, any dividends and franking credits, any realised gains less any realised losses less any expenses. It is important to note net realised gains (realised gains less realised losses) vary greatly from period to period, may be negative and often make up a large component of distributable income.

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