Franking credits proof that no policy is set in stone

Financial planners know better than most how quickly Governments can change policies and how that knowledge should be factored into the strategies they recommend to clients.

In the immediate aftermath of the 2019 Federal Election, it is worth suggesting that financial planners should take pause to consider the transitory nature of Government policies and just how careful they need to be in helping clients set their strategies.

Nothing serves to illustrate this better than the reality that the election of a Labor Government would result in the removal of two staples of many wealth creation strategies – negative gearing and refundable franking credits.

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To put this into context, readers need to reflect upon the numerous other policy decisions put in place by governments over the past 15 years and which therefore became embedded in wealth accumulation strategy decisions only to be removed or significantly pared back when a new government came to power. Transition to retirement (TTR) comes to mind, as do superannuation co-contributions and, of course, the allowable level of concessional super contributions.

It is therefore incumbent on advisers, as it always has been, to explain to their clients that all policy-based strategies (virtually all of them) should not be regarded as set in stone but, rather, open to change at the discretion of the government of the day subject to passage through the Parliament.

Few proposed policy changes over the past 20 years have served to animate the financial services industry more than the ALP’s proposals to end the refundable franking credits regime simply because it had become such an integral part of so many post-retirement planning strategies, particularly for those with self-managed superannuation funds (SMSFs).

No one, not even the ALP, debated the degree to which the proposed changes would impact the retirement incomes of those affected but its Labor proponents judged that it would not affect the vast majority of the electorate and that therefore the political downside risks were manageable.

By comparison, the ALP arguably hedged its bets where ending negative gearing was concerned by undertaking to grandfather existing arrangements.

Why the difference between negative gearing and franking credits? Because of the Labor Party’s desire to avoid a knee-jerk reaction in the housing the market and because eliminating refundable franking credits has the virtue of delivering an almost immediate boost to the Budget bottom line.

At the time of writing the outcome of the 18 May Federal Election is still not known, but should a change of government occur then financial planners, particularly those providing advice to clients with SMSFs, will find themselves busy adjusting strategies and investment allocations to cope with the changed circumstances.

Will there be an impact on markets? Probably. Will it unsettle a Shorten Labor Government? Probably not.

And the question needs to be asked: In the event of a loss on 18 May, is it likely that a future Liberal/National Party Coalition would reinstitute the franking credits regime introduced by the former Howard Government and which became effective in 2001.

The answer is maybe, but the prospect is remote in circumstances where for at least the next decade a future of Australian government is unlikely to have charge of an economy capable of funding such a policy.

In the meantime, the ALP’s approach should serve as a reminder to planners that governments change and so too do policies.

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