In markets and in politics, retail investors are often overlooked, and their voices are rarely heard.
Labor’s plan to scrap full tax refunds will cause misery and suffering to low-income earners and modest retirees who have worked, saved and invested under a fair system that should be respected and safeguarded by all sides of politics.
The current system works. Dividend imputation was established in 1987 by the Hawke government to eliminate double taxation of company profits at the corporate and shareholder level. In 2001, the Howard government improved the system by ensuring individuals receive a tax refund to compensate them for their overpayment of tax at the company level. At the time, Labor leadership claimed it was also part of their policy.
Dividend imputation has significantly benefited Australia’s financial system and is one of the reasons Australia has not experienced a recession in 26 years. The current system enables:
- robust capital formation in Australia;
- efficient capital distribution;
- a more stable economy with reduced cyclicality; and
- a progressive taxation system.
The removal or adjustment of dividend imputation would be enormously detrimental to the Australian financial system. If Labor is not stopped, it would continue to erode the current system to the detriment of all Australians.
Independent MP Kerryn Phelps called for a moratorium on changes to the superannuation system, given people need certainty to plan for their retirement and future. I believe that a large part of Phelps’ success in Wentworth was driven by her overt support for the current system.
It is poor policy and terrible timing. Labor’s agenda back in 2012 is relevant today. With their eyes on the revenue flowing to Australian miners during the mining boom, the Rudd government tried to introduce the Minerals Resource Rent Tax. Of course, the commodity bull market was in its dying days, and the policy was both flawed and poorly timed.
Similarly, Labor’s attack on the equity market comes in the final stages of a record-breaking bull run. The recent stock market rout has wiped out the 2018 calendar year gains in the US, while China’s equity market has fallen by nearly 30 per cent from its peak earlier this year, and the Australian market has entered a technical correction.
As our financial system incentivises all Australians to save and invest for their future, retail investors make up a significant proportion of our equity market. Looking at the big four banks, which make up 21 per cent of the S&P/ASX All Ordinaries Index, retail investors comprise 43 to 53 per cent of the share registries by value.
Labor’s changes would see $36 billion wiped from the value of Australia’s big four banks if Citi Group’s forecasted share price decline of up to 10 per cent occurs. Retail investors would be hurt the most, collectively losing $17 billion, solely from their bank shareholdings. Of course the effects would be felt across the market and negatively impact all Australians.
Bear markets are extremely painful, and we expect the negative effects of the looming cycle will be significantly worse if Labor wins office. We believe Shorten and Bowen’s plans will have dramatic implications for the equity and property markets, resulting in the first economic recession in Australia for 27 years.
The economic case for protecting Australia’s current dividend imputation system is clear. What concerns me the most is the impact to the household budgets of financially vulnerable Australians.
We have received more than 25,000 signatures on our petition to stop Labor’s changes. Approximately 70 per cent earn $90,000 or less per annum and almost 85 per cent would lose up to $30,000 a year. One-third plan to spend their financial assets to receive the Age Pension.
We have also received almost 2000 stories about how people will be impacted by these changes. The collateral damage of this policy is highlighted in this story:
“I am 68, divorced, and support a dependent adult child. I rent, don’t own property, and still work full time. I have sacrificed and “gone without” for many years in an endeavour to be self-sufficient and independent in my retirement – however long that might be. Most of my assets are in blue-chip Australian equities in a SMSF, which I have carefully built up over the years. Having access to cash franking credits was an integral part of my plan to be independent. I currently receive approx. $25,000 in franking credits – which pays my rent. I will lose this under Labor’s proposal …
“I understand they may want to ‘make “the wealthy” pay their fair share’ – but they don’t seem to notice that they only hurt ordinary people trying to do their best. The ‘wealthy’ have the means to deal with these sorts of changes; ordinary folk do not. It is cruel and morally wrong to impose such change on people who are already retired and can’t do anything to offset it … At 68, I simply don’t have time to change direction to counteract this sort of loss.”
Geoff Wilson is chairman of Wilson Asset Management.