Jim Stening, FIIG founder and managing director. Picture: Glenn Hunt
The federal government needs to match the tax concessions offered to retail investors through franking credits if it is to encourage Australians to invest in corporate bonds, according to the nation’s biggest fixed-income investment manager.
FIIG managing director Jim Stening told a parliamentary inquiry into the Australian corporate bond market that retail investors considering putting money into debt issued by Australian corporate majors were discouraged from doing so by the massive incentives offered to other asset classes, particularly dividend imputation on franked credits and negative gearing concessions on property investment.
In a written submission to the inquiry, FIIG said ATO data showed self-managed super funds had a “perilously low” allocation to fixed-income products such as corporate bonds, with only $11bn allocated to the asset class out of the $715bn currently invested through SMSFs.
That exposes older Australians to wild swings on equity markets as they chase dividend-paying stocks for the value of franking credits, or the risk of losses from property sales if the market headed south, FIIG said.
Mr Stening told The Australian that investors in more mature debt markets, such as the US, would typically adopt “best practise” portfolio management of devoting 20-25 per cent of funds to fixed-income investments, including corporate bonds, as opposed to the roughly 1.5 per cent allocation in Australian SMSFs.
But Labor’s failed charge at the last federal election against tax concessions that biased investment decisions into franked credits and negatively geared property suggests it was now “politically impossible” to wind back existing concessions, Mr Stening said, and FIIG’s submission instead argues for the introduction of equivalent tax breaks for corporate debt investments and other fixed-income products.
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“People dismiss fixed-income investments because of the tax benefits of the other asset classes and really, when you think about it, that doesn’t make any sense. You should be able to invest for the quality they provide the portfolio, it shouldn’t be a tax consideration,” he said.
“But rather than try to change those things … within that savings vehicle there should at least be something attractive from a tax perspective about holding fixed-income products.”
FIIG’s submission argues for the introduction of tax exemptions for 40 per cent of any return from fixed-income assets with an SMSF, along with new taxes on offshore bond and debt issues to help create a bigger market for local bond issues, which the company argues will also encourage retail investment into the debt -issued by successful Australian companies.
While Australia’s major banks and resources giants such as BHP and Rio Tinto are as well known to the financial community offshore as they are locally, well-established fixtures of Australia’s corporate world, such as WA-based Mineral Resources, which last year tapped US debt markets for $US750m in unsecured notes, have to work harder to convince overseas issuers of the value of their business.
Mr Stening said he thought it was bizarre that a company such as MinRes would be forced to look overseas to run a bond issue.
“Call me a bit of a cynic, but it’s very profitable for banks to take these companies to the US market, because obviously there are currency swaps involved and various other things, and if you were issuing into the domestic market there wouldn’t be,” he said.
“So there’s a bit of a headwind — the banks would sometimes rather this market not develop here because it could mean a far less profitable proposition.”
The Australian, 23 June 2020. Author: Nick Evans, Resource Writer - The Australian
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