How To Beat Franking Credit Changes
It’s going to cost retired Aussies 9% of their nest egg, or a 5% pay cut to their annual income, according to ANU analysis.
But it’s costing the taxpayer $30,000 and the change would line Government coffers with an extra $50-something billion.
Of course, I’m talking about the plan to remove franking credit REFUNDS.
What Are Franking Credits?
What Do I Think?
Initially, I thought reigning in excess credits wouldn’t be such a bad idea because it would force investors to invest in more growth style ASX shares and be good for the economy.
Then I remembered why we have franking credits in the first place…
If you invest $1,000 in a rental property, you’ll be taxed when you sell and taxed on the rental income. Fair enough.
But if I invest $1,000 in a company (aka the sharemarket) — the company is taxed at 30%. And if I receive a dividend (part of the profits) I’m taxed again at my marginal tax rate.
Meaning, you, the property investor, are far better off simply because you invested in property — and I bought shares of a company. Does that sound fair?
In my opinion, capping the payout of franking credits make sense. But an outright ban would be a disaster.
But obviously I’m just another biased sharemarket investor…
3 Ways I’m Avoiding Changes To Franking Credits
I’m not convinced the proposals will become law. Nonetheless, my investment strategy is not dependent on franking credits to make a sizeable return on my family’s wealth.
Here’s how I do it:
The first thing is easy: invest outside Super. Many Super funds are going to be hit by the changes to franking credits. Some, but not all. Investing inside and outside Super (i.e. in your personal name) is therefore vitally important.
As an aside, the goal posts for Superannuation have changed so many times in just 5 years that I’ve lost almost all confidence that it will still be a decent place to invest money in 10 years.
Second, invest in growth shares. In my opinion, ASX shares are still one of the no-brainers for investors looking at places to park their long-term wealth.
For me, that means finding the small, fastest-growing hidden gems on the local sharemarket. For example, as I write this, the first ASX share I bought for the Rask Invest model portfolio has risen more than 50% in around four months. Another company, which I bought last month, hasn’t budged in price since I released its name to Rask Invest members — and I reckon it’s even more undervalued!
Thirdly, I invest abroad. Australia is a tiny part of the world economy and (regrettably) lacks many truly world-class companies (such as the company I’m about to buy for the Rask Invest model portfolio).
Sure, you won’t get franking credits. But many overseas companies pay huge dividends and offer much more growth potential than Aussie blue chips.
As a bonus, investing abroad means investors (like me) boost their returns when the Australian Dollar falls (as it has in recent months) and it can offer diversification benefits.
With much of my model portfolio invested overseas, that’s something I can cheers to…
Cheers to our financial futures!
Lead Adviser of Rask Invest
P.S. to access all of my financial research (including my next #1 share idea, join me on Rask Invest today!