How to Adapt to the Labor Party’s Reforms to Franking Credits

According to the Sportsbet odds, there is a very good chance that the Australian Labor Party will win the next election, and there are a number of proposed policies that will have a large impact on investors.

Sportsbet odds as of 6 April 2019 have Labor winning the next Australian federal election

I don’t want to focus too much on my personal political views as I feel I should only discuss personal finance here, but personally, even if I benefit economically by voting for the Liberals, there are many other non-economic issues that bother me about the Liberals e.g. it is highly likely that there is a Nazi faction within the Liberal party. This raises the likelihood that the Liberals will engage in Trump-style divisive politics based on racism and sexism. Furthermore, something I care about more than money is the environment, and the Liberals are filled with climate change skeptics.

Back to the topic of personal finance, one proposed Labor policy is banning refundable franking credits. This has mislead many people who think that franking credits will be banned. In order to understand what this policy is, it is important to understand what franking credits are.

Australian companies pay a corporate tax rate of 30% on their profits. A portion of the profits is then distributed to to shareholders as dividends. However, when shareholders receive dividends, they pay tax on their dividends. As a result, there is “double taxation” i.e. the company pays taxes on profits and then the shareholder pays income tax. To fix this problem, when companies pay dividends, they can attach franking credits to it, which allows the tax paid by companies to be refunded back to the shareholder.

Companies pay 30% corporate tax, but shareholders pay income tax, and given that there is progressive taxation is Australia, shareholders may pay anywhere from zero tax to 45% tax depending on their income. The higher your income, the higher your income tax rate. If you are on the highest income tax rate of 45% then the franking credits that refund the 30% corporate tax back to you will not cover all your taxes and you will still need to pay money to the government. However, there are many people who retired who have low income and live off dividends. Because they earn little, they may pay zero income tax, but because dividends have franking credits, they are in a position to receive money from the government. It is these cash refunds that Labor is targeting, not franking credits in general.

How to adapt to the new policy

Franking credits do not apply to all investment income. For example, income from property has no franking credits e.g. REITs. Furthermore, income from outside of Australia e.g. US equity ETFs such as IVV pay dividends with no franking credits.

In order to adapt to the new policy, simply increase the amount of unfranked investment income you receive. Once the amount of unfranked investment income increases, the income tax you pay will rise. Remember you only get a cash refund when your personal income tax is below 30% so if you increase how much unfranked investment income you receive such that your personal tax rate is at or above 30% then any franking credits you receive will simply offset the taxes you pay on the unfranked income you receive, so you don’t need to worry about receiving a cash refund.

As I said, the easiest way to achieve this is to invest not just in Australia but to go overseas and invest outside of Australia. Examples of ETFs that achieve this are VGE (as well as the ethical equivalent VESG) as well as INCM, which is globally focused equity income ETF. Another option is to invest in AREITs e.g. SLF, which invests mostly in Australian commercial property and pay quite high rental yields.

Does Too Much News Overstimulate?

There is something I’ve noticed recently, and that is that news or a lot of material on the internet is highly addictive. When you read something controversial or scandalous or sensationalist, it is stimulating, and often in real life there are many moments of boredom, so I turn to the news on my phone in order to stimulate myself, but what ends up happening is that this stimulation is so overwhelming that it takes over my mind, and I find I cannot concentrate at all. When I am at work, I am distracted by my thoughts.

I’ve decided to implement a zero politics policy into my personal life whereby I block all political news. The only exception, of course, is political news as it relates to financial markets, so I need to keep track of financial news because I am a dividend investor. However, I am very selective. I tend of only read trusted dedicated financial news websites, such as Bloomberg or MarketWatch.

I am blocking political news because much of it nowadays, I believe, is fake, regardless of which side of politics you subscribe to. The individual also has little control over the political process, so knowledge of politics is of little use. Politics only serves to distract and stress you out.

There has been a trend lately of many people who manufacture drama and conspiracy on the internet in order to advertise ebooks that they are selling, so it is not just politics I am blocking but also manufactured drama and conspiracy. There is so much out there on the internet that I am blocking. In general, I am just more discriminatory now with what I look at because the internet is very vast. We cannot look at everything, and a lot that is on the internet is wasteful and harmful.

Social media apps such as Twitter are very useful because it’s very easy to unfollow and mute certain people. Something else I find is useful is to turn off notifications unless it is from someone you really trust. Too often social media apps recommend news to you. This should be turned off because it distracts you all day.

The Yerkes-Dodson Law

Lately I have discovered the Yerkes-Dodson law. Here is Wikipedia’s definition of the Yerkes-Dodson law:

The Yerkes–Dodson law is an empirical relationship between arousal and performance, originally developed by psychologists Robert M. Yerkes and John Dillingham Dodson in 1908. The law dictates that performance increases with physiological or mental arousal, but only up to a point.

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Too little arousal leads to boredom but too much leads to strong anxiety, which impairs performance

I realize that I may be a victim of impaired performance due to overdosing on arousal on the internet, and this is having a crowding out effect because sensationalist contrived drama and conspiracy on the internet is taking over my brain and preventing me from dedicating my attention to the dull but important things in my life.

All this arousal from conspiracy, negativity, and drama is stealing time and energy from me, time and energy that I could use for more important things. I need to cut it out.

 

Why Left vs Right is Dumb

One of the most absurd ideas in politics is that everything is either left or right. You are either a liberal or a conservative. The reason why this is absurd is because there are many different political systems that can be used and within a government there are many different policies that can be implemented. Politics is complex, and left versus right oversimplifies.

For example, I once spoke to someone and told him that one simple way that the government can raise more revenue is to increase taxes and then all of a sudden this person called me a “liberal” and then started criticizing me for supporting abortion. I make one comment about taxation and then suddenly my views on everything else is known. I am pro-abortion, for gay rights, etc.

This is very similar to racism. Racists will assume, for instance, that just because someone’s skin is black that he is a criminal when logically this is false. Not all black people are criminals. Likewise, just because someone wants to increases taxation, it doesn’t mean they are pro-abortion. In fact, what does taxation have to do with abortion?

This is what is wrong with left versus right. The views lumped together on the left have nothing to do with each other. Just because someone is pro-abortion, why would that mean he is pro-taxation? Just because someone is anti-taxation, why would that mean he is anti-military?

There is absolutely no logic to the political spectrum, but I suspect many people love it because it fulfills the human need to belong to groups.

Trump vs Clinton – News vs Betting Markets

There is a considerable amount of news showing polling results that suggest Donald Trump leads Hillary Clinton currently.

However, betting markets still predict Hillary Clinton will win, so what is happening? I’m inclined to trust betting markets, so perhaps the media is trying to push momentum one way.

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