The potential change to franking credits is focusing my attention on ASX growth shares.
Labor has promised to eliminate franking credit refunds for non-pensioners, although franking credits can still be used to reduce a tax liability.
This means that for people with taxable income under $18,200, they won't get their franking credits back.
Suddenly that makes the attractiveness of Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA) and Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) seem a little less good.
Australia has always been very generous with the dividend system because the franking credits is an added bonus compared to US or European shares, particularly for businesses where most of the returns come from dividends. I personally wouldn't value Telstra shares as highly if I couldn't get the full benefit of the franking credits.
Some investors like Wilson Asset Management and AFIC are trying to get Labor to change their mind, but so far they are not budging.
Whatever your feelings on the issue, it will probably have an effect on dividend shares. That's why I think growth shares would become more attractive – most of the returns are from capital growth, not dividends & franking credits.
Foolish takeaway
Businesses re-investing into themselves at high rates of return will generate the strongest returns over the long-term, which also generally happens to be growth shares.
Charlie Munger has said himself that in short periods of time businesses that generate low earnings on the equity or assets can outperform, but over the long-term it's the ones that generate high returns from their balance sheet that will generate big returns, such as REA Group Limited (ASX: REA) and Altium Limited (ASX: ALU).
