When Markets & Politics Collide

Investors understand that investing comes with risk and markets move in cycles. Voters understand that governments will make unpopular decisions at times. But in recent times markets and politicians have combined in something of a perfect storm for those of the generation where silver hair comes naturally.

For a start interest rates were cut to a record low of 2% by the Reserve Bank. Then bank shares – that staple of the well-funded retiree portfolio – took some headline-grabbing hits. Finally the federal government announced measures to tighten pension eligibility rules. That will see around 91,000 people losing their part-pension and joining the ranks of self-funded retirees from January 2017 although that impact is offset by the policy changes that will mean about 50,000 part pensioners will get a full pension. The other key concession made in the announcement is that while a cohort of people will lose their part-pension they will be guaranteed their health care card benefits.

With a number of major policy shifts having been flagged before this week’s federal budget is delivered on Tuesday night investors are probably hoping for a period of relative calm on the regulatory change front.

Regrettably no one should be surprised that retirees – and those within sight of retirement – will have to contend with higher levels of regulatory uncertainty and risk possibly for years to come – certainly up to and beyond the next federal election due later next year.

The reason that regulatory uncertainty is here to stay for the foreseeable future is because of the range of policy reviews either under consideration or looming.

For a start the Government is yet to respond formally to the recommendations from the David Murrary-led Financial System Inquiry.

The Murray inquiry was a year-long major review of the financial system at the macro level and its recommendations – depending on which ones are adopted – have long-term implications for sectors like banks and the broader superannuation system.

While the Government’s response to the Murray recommendations is imminent the review of our tax system that has been kicked off with the "issues paper" is longer term but may be the one that investors should pay closest attention to.

Clearly the structuring of our concessional tax treatment of super is on the policy table but the other hot buttons for the tax review are the cost of tax concessions flowing from negative gearing which will be of strong interest to property investors while for share investors – and particularly self-funded retirees – is the way our dividend imputation system operates.

Dividend imputation was introduced in 1987 to remove the double taxation on company earnings.

It has become an entrenched part of the Australian investment landscape and particularly for investors operating a self-managed super fund in pension phase the refund of the imputation credits are highly valued.

In a low interest rate environment the appeal of high-yielding shares on an after-tax basis is obvious.

The issues raised around dividend imputation are wide-ranging but perhaps centre on whether or not the system – which Australia is one of only a handful of countries to have – distorts the cost of capital and therefore the way Australian companies invest. For example it is argued that dividend imputation causes Australian companies to adopt lower leverage while at the investor level imputation credits are argued to partly explain the bias towards domestic (vs foreign) equities.

Individual investors can no more control government policy developments than they can investment market moves and certainly no-one is suggesting wholesale changes to investment strategies based on policy debates.

However, the potential for change suggests investors need to stay across the issues.  If you are the trustee of your own SMSF the responsibilities are even more direct.

That is why having access to specialist advice – potentially from a range of advisers – on your SMSF will be vital to help navigate the uncertain waters ahead.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.