Westpac tips proposed policy to hit listed income securities
With Labor’s proposed imputation credit policy expected to impact hybrids and other listed income securities if enacted, SMSFs with heavy exposures to these investments may need to think about diversifying their portfolio.
Westpac private bank executive financial planner Marc Smith said that the federal election is likely to take place in the first half of 2019, and the imputation credit policy, if passed as legislation, would come into effect from 1 July 2019.
“If Labor do get elected and the proposal is passed as legislation, then it is expected to have an impact on Australian listed shares, not only ordinary Australian shares, but also ‘listed income securities’ such as hybrids and convertible preference shares. Both of these types of investments tend to have a franking credit attached to them,” Mr Smith said.
“At the moment, bank hybrids are very popular with SMSF trustees because they tend to provide a higher yield than if a client was to obtain their funds in cash and term deposits.”
The issue with hybrids and other listed income securities, the executive financial planner explained, is that it is assumed that investors can claim the associated franking credits in full.
“The return that they state for hybrids actually includes the franking credit — in a grossed-up sense. If you actually strip out the franking credit, then the return on hybrids is lower and at a much more modest rate,” Mr Smith said.
“That begs the question as to whether hybrids will be worth investing in under the Labor proposal for the level of risk involved because hybrids do carry a degree of risk.”
Mr Smith said that SMSF investors may rethink their weighting to these investments and begin to shift more assets into overseas equities or asset classes.
“Even if Labor’s proposal does not come into play, it is still worthwhile for investors to address the weighting bias towards domestic shares over international shares,” Mr Smith said.
“Despite the obvious taxation benefits of franking credits under the current system, if you actually look at the numbers over the last decade, it shows that the Australian share market, even including the tax benefit of franking credits, has underperformed the global share market.”