Will Labor’s policy on franking credits impact you?

The consensus now is that there is a high likelihood that Labor will win the next Federal election, likely to be held in May, so many people are wondering whether Labor’s policy to limit the refund of franking credits will impact them.

Labor’s proposal is that franking credits, which attach to dividends and are a credit to the taxpayer for tax paid by a company, will only be available to offset income tax owed by the tax -payer. This would mean that some people, such as self-funded retirees with little if any income tax liability (remembering superannuation pension income is tax free for those aged 60 or more), would no longer receive the refunds of tax paid by the Australian companies in which they hold shares. Self-Managed Superannuation Funds with Members in pension mode are one group that would be significantly impacted by this change if it becomes law.

Assuming Labor was successful in passing legislation to implement the proposed change (and that’s not certain given the potential for the Senate to block enabling legislation), franking credits which reduce income tax payable by an individual or other owner, such as a super fund, will still be available to many tax payers. Most investors who are working and super funds liable to tax because they are in accumulation mode, should not be impacted. However, individuals or super funds with no tax liability will lose the refund they currently receive. Labor expects to reap billions in additional tax revenue through this change so clearly many people, principally self-funded retirees, will be impacted significantly.

Two big events that will impact the direction of share markets

Since the significant falls in the Australian and overseas share markets in October we have seen increased volatility and some recovery but no clear direction. It is never possible to consistently predict short term movements and investors should be focused on the medium to longer term anyway because that’s more predictable.  However, there are two potentially very significant events happening over the next week that may provide some clear direction.

Firstly, US Federal Reserve Chairman Jerome Powell’s speech on Wednesday to The Economic Club of New York is expected to provide some clarity around the Fed’s future interest rate moves. There is no doubt that the market’s fears of an excessive tightening by the world’s most important central bank have escalated significantly in recent months. The market expects that the FOMC (Federal Reserve Open Market Committee) will raise rates by 0.25% on 19 December but it is what Powell says about the outlook for Fed policy in 2019 which will be the most important part of his speech. If Powell is “dovish” by indicating less likelihood of interest rate rises in 2019 because of a potentially slowing US economy, then share markets are likely to rally. Conversely, if he is “hawkish” then markets may react negatively.

The second big event is the meeting between President Trump and Chinese President Xi at the G-20 meeting in Argentina this coming weekend. Markets are concerned about the potential for a long-drawn out economic war between America and China and recent speeches by Vice President, Mike Pence suggest this is very possible. If Trump delivers an aggressive rebuke of China and a confirmation of 25% tariffs on many goods from 1 January 2019 then expect share markets worldwide to fall. However, Trump is very unpredictable and if he indicates that the proposed increase in tariffs will be put on hold due to positive discussions with Xi expect the markets to rally.

Don Stammer’s X factors for 2018

Esteemed economist Don Stammer has for many years been labelling one unpredictable event as his “X factor” – something that was unforeseen but very important to financial markets over the previous 12 months. These X factors highlight why “expert” predictions as to what will shape markets in the coming year are frequently wrong. As usual there are lots of contenders for the X-factor of 2018. Stammer says they include, in no particular order:

  • The whole of the US yield curve for government bonds has moved significantly above the Australian yield curve;
  • Our ditching a fourth prime minister in eight years;
  • The huge impact of the royal commission into banking and financial services, even before the release of the final report;
  • Escalating trade wars;
  • The continuation and speeding up of the US economic upswing that began in 2009;
  • In many countries, including the US and Australia, modest inflation despite strong growth in jobs;
  • The increase of 25 per cent in US corporate profits in the 12 months to mid-2017, thanks mainly to the US tax cuts;
  • Brexit;
  • The failure of Bitcoin (and its look-alikes) to provide investors with the stable or predictable store of value that its promoters claimed;
  • The nasty wobbles in share markets in February and in recent weeks;
  • Trump’s much-criticised decision-making and governing;
  • In China, just a mild slowing in growth allowing our bulk commodity prices to hold up well; nonetheless, Chinese share prices falling sharply;
  • Investors’ increasing realisation that the Fed is serious about normalising US monetary policy;
  • The widening spread, here and abroad, between the official cash rate and bank funding costs;
  • Intense concerns of an imminent crash in housing prices, despite the orderly decline, to date, in the median house price; and
  • Our household saving ratio falling to zero.

In Stammer’s view, “the X-factor this year is the huge impact of the royal commission into banking and financial services. It’s a damning report, exposing many failures, misconduct and bad advice on the part of financial service providers and advisers”. Unfortunately, I must agree with him that this has been a big deal for Australians with many flow through impacts, including a tightening of bank credit standards which has impacted the residential property market.

Why you should consider pet insurance – Ruby Update

Andrew’s beloved Labrador, Ruby, recently swallowed a ball that had to be surgically removed and resulted in a sizeable vet bill; nearly $4,000. Fortunately, she has recovered very well but this is the second expensive health incident she has had and she’s not quite 3 years old; we are glad we took out pet insurance which has covered most of the costs. As with humans, health events are unpredictable but there’s no Medicare for animals so it is certainly worth considering taking out pet insurance if you wish to avoid the possibility of a large bill for treatment of your dog or other animal.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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