Bill Shorten's reassurance that only the wealthy will be impacted by his promised ban on cash rebates from franking credits probably understates the wide-reaching consequences of his policy on investors.
The Foolish takeaway from this development is that government policies almost always have blast area that is larger than the targeted zone.
Labor's proposal to stop non-tax paying investors (touted as rich retirees) from receiving a cash refund from the tax office on the franking credit attached to their dividends is no exception. If anything, the fact that very wealthy retirees pay no tax points to a problem in another area of our tax system!
But that's an article for someone else to write. The more important issue to everyday investors is the unintended consequences of the policy on investment markets, and experts interviewed by the Australian Financial Review had plenty to say about this.
The news isn't good for Australia's blue-chip high-yielders that have long been a hot favourite by income-seeking investors – particularly self-managed superfund (SMSF) investors.
These stocks include our biggest telco Telstra Corporation Ltd (ASX: TLS), the big four banks like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB), and infrastructure players like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD).
The ban on cash refunds is likely to push investors away from directly owning these stocks and into investment trusts, such as real estate investment trusts (REITs), as the distributions (which include any franking benefits) from these vehicles will remain tax free to an SMSF in the pension phase.
What's more, these investors will also pay no capital gains tax when they sell their holdings in unit trusts, according to the AFR.
I strongly suspect we will see some "creative investments" come on market if the ban becomes policy. We might see a series of new listed unit trusts that only contain shares in our highest yielding stocks being sold to investors to capitalise on the loophole.
This could defeat the purpose of the original ban, which is meant to shore up the federal budget.
Further, a Labor federal government will also create a bias towards industry funds (surely that's by coincidence!) and international shares.
It's too early to worry about the unintended impact of the Labor policy as Bill Shorten needs to win the election first, but it's something investors should start thinking about.
The good news is that the franking rebate issue won't impact on the outlook for growth stocks and there is a fast growing sector that the experts at the Motley Fool are particularly bullish about for 2018.
Click on the link below to get your free report on this sector and to find out what stocks are best placed to ride this investment thematic.
