The next Federal Election seems to be quite an interesting one to be watched by the equity holders and investors. It was recently announced that Labor Party, if elected, will now not give any extension for the dividend scheme crafted by John Howard and Peter Costello, and will reinstate the original scheme implemented by Paul Keating in the late 1980s, leading to an end to the cash refunds which shareholders currently receive.
Dividend imputation was nested by Keating in 1989, to prevent double taxation of dividends – once taxed as Company’s profits and later as a personal income of the shareholders. Thereafter, Howard Government introduced the scheme of imputation credit where individuals and super funds could claim cash refunds for any excess imputation credits not used to offset the tax liabilities.
The recent announcement has thus jolted many investors, particularly, self-funded retirees, who pay little or no tax as they will now not be able to receive cash refunds for excess dividend imputation credits after Labor’s new dividend policy is implemented. The new policy is slated to generate revenue of $59 billion over the next decade while helping to carve-out savings of $11.4 billion over the forward estimates. Further, about 8 per cent of tax payers would be affected and about 200,000 of self-managed super-funds will be under hammering. Currently as per Labor, some self-managed funds claim cash refunds of about $2.5 million. Once this policy will come into existence, Labor will leverage the opportunity relating to personal income tax deductions that the Turnbull Government is planning to offer in view of continued low wages growth.
Labor claimed that Australians will continue to enjoy the imputation credits but only to reduce their tax liabilities not to claim cash refunds. It will impact only a small number of shareholders who have no tax liability and only use their imputation credits to receive a cash refund, so while people will not be paying any additional tax, they will just not get the cash bonus which they currently claim.
This nonetheless, can push the investors shy away from dividend stocks and investment in trusts like real estate investment trust (REITs), might become popular where they will not have to pay any capital gains tax when they sell their holdings in unit trusts. There is also a possibility of launch of new investments including a series of new listed unit trusts that might contain highest yielding stocks which can be sold easily so that investors can capitalise the scenario abridging the gap in the portfolio.
Looking at the current scenario, the future of the growth stocks still looks intact but blue-chip high-dividend yielding stocks can be impacted. For instance, income-seeking investors’ favourite stocks like Telstra Corporation, the big four banks including Commonwealth Bank of Australia and National Australia Bank Ltd. and other infrastructure giants like Sydney Airport Holdings Pty Ltd may be derailed by this shift in policy. For instance, the proposal of this change only led Telstra slip a bit in last few days (1% in one month). Further, banks have been smitten by the Royal Commission and the above move might add to the woes. While the whole scenario hinges on whether Labor Party will win the election or not, the announcement has started to affect the shareholders who once slept peacefully with income stocks under the pillow. Not widely discouraged by the news, the investors may now need to be more vigilant of the macro changes in order to keep the right foot forward when it comes to investing.
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