What is Bill Shorten really planning for pensioners?

This week James Kirby and Alan Kohler discuss the following:
  • Shorten and franking. All hell has broken loose. Partly helped because Turnbull and Morison have “cranked it up”.
  • A lose lose for the Labor party because the only people who understand the policy.
  • Trump and tax. It was all about a power play at the Whitehouse between globalists and trade warriors.
  • The early howlers at the banking royal commission, including the gym instructor flogging home loans.
  • Solomon Lew’s spare change and Myer.
  • A vote of confidence in crypto despite the pessimism surrounding bitcoin.
  • Listener questions: more ETFs.

Hello, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

And we are The Money Café.

The Money Café.

Well, James, g’day.  We’ve got a few things to talk about today.  We’ve got Bill Shorten’s stuff on dividends, the Royal Commission on banking, trade wars, a bit on Bitcoin a bit on Myer, but there are big issues to talk about and we’ve got lots of questions today.

Yeah, a couple of juicy questions, I just had a quick look at them, yeah that’s right.

We’d better get stuck straight into it, mate.  Now, the dividend franking is your meat and potatoes, Mr Wealth Editor of The Australian.

Yes, it is. 

This is you.

Isn’t it funny because I was just thinking this morning the ALP and Bill Shorten, they came out and they said we’re going to change capital gains tax, nothing happened, they said we’re going to change negative gearing, not much happened, they said we’re going to change a small item on the tax bill which is that pensioners, because they’re tax free, when they get a franking credit they get a cheque, an average cheque of 5,000, we’re going to change that.  Now we’re not going to give them the cheque anymore and we’re not going to compensate them.  Guess what?  All hell broke loose, it really did.  Certainly, I’m stretching to think of when there was a bigger uproar, even the super changes, even the imposition of tax on retirees last year didn’t get a response like this.

I think it was partly helped by the fact that the Coalition and Malcolm Turnbull have had such a shocking time lately and they’ve been in the wars and Bill Shorten has been able to just sit there with his head down enjoying and watching the show.  So, I think Turnbull has cranked it up, and Morrison have cranked it up, because of that.

They cranked up the issue?

They’ve gone a bit hysterical, let’s face it.

Well, they have.  I’m not interested in the politics of it, different parties try different things all the time.  But, the worst thing is that Shorten has said that this is a tidy little arrangement for people with millions, that is really, really unfair, that’s the first part because it’s not.

And it’s wrong.

It’s misleading.  Of course, there are people with millions in super, there’s people with millions all over the place, look at the average price of property.  The issue is that the majority of people getting this little payment, this couple of thousand dollars a year get it because they’re pensioners and because they’re tax free.  He has isolated them, targeted them, worse still if you’re in an industry fund you don’t have to worry about it and in a way it really makes it imbalanced between self-managed super funds and industry funds.  Then as I say the worst thing of all is that this particular group has already had their pensions peeled back in January, they’ve had caps put on super contributions and super income in July and then within a year they hear that this is the next plan from potentially the next government.  So, I’m not surprised that they’re up in arms about it actually.

No, and I think politically – I mean I understand you’re not interested in the politics of it but I think the politics of it is quite interesting because the people who understand what Shorten and the Labor Party have done are the losers, right, they’re all the losers.  The winners from it, who are the people who aren’t in receipt of franking credits, don’t understand it.

No, they don’t.

So, it’s an absolute lose-lose for the Labor Party because there are always, in these sort of things, winners and losers except in this case the winners don’t get it and the people who do get it are the losers.

Yeah, that’s right.  Like I was saying they isolate this bunch, they really do isolate them and I think it must be infuriating.  I’ll tell you what’s the most infuriating thing, this morning now Shorten is talking about some compensation for people at the lower end, the people getting really small cheques, a couple of hundred dollars a year for their franking credits.  What he’s talking about is welfare.  So, he is talking about putting people who are trying to make a self-funded retirement, putting them on welfare.  He is actually imposing welfare on people who are trying to get away from it at its very worst.

And also people who are on part pensions because they are receiving 100% franked dividends are going to be back on the pension, or at least more of the pension.

Why wouldn’t you, why wouldn’t you throw up your arms and say that’s it, I really couldn’t care anymore, I’ll just go around the corner and get a pension and make it easy, I won’t have to think again for the rest of my life.

That’s right.

I think that that’s a risk, I think it’s going to happen to a certain degree but I also think there’s a hell of a lot of people out there who do not want to be beholden to the government and their various policies, and do want to be self-funded.  They shouldn’t be penalised, god almighty, they should be incentivised.

There’s a couple of other things to point out.  Firstly, is that the superannuation policy can’t sit still, it’s changing all the time and both sides of politics are changing it.

Yeah, fine, it’s evolving.

No, but it’s become a matter of the political contest so that the one thing you can be sure of as a user of superannuation policy in whatever way is that if there’s a change of government there’s going to be a change of policy and so you can’t have any confidence in stable policy.

I wouldn’t mind the policy evolving and I think most people would say that’s okay, it’s not static, but the issue is that there hasn’t been an incentive for a decade and it’s just been a line of penalties progressive by different governments.

That’s right.

So, the end user sits there and gets walloped left and right by different parties, it doesn’t matter really which party is doing it.

Well, it’s because the governments, not just the Australian government but all governments, are under such pressure for their budgets.  Which brings us to…

Quite beautifully done there, Alan, on the segue front.

To the BT Financial…

It’s the BT Mega Trend Moment sponsored by BT Financial Group.  The Mega Trend this time around, this week, is – how would you articulate the Mega Trend, Alan?

The great government cash grab, what about that?  The tax man wants your cash.

They always want your cash but stand by folks, they’re going to want it a lot more than they used to because the deficit has blown out and we’re going to have to bring it in and they’re going to have to find revenue somewhere.  As I say the rotten thing is they keep aiming it at the same bunch of people.

Well, because what they can’t do is cut spending.

No, can’t do that, god no.  Did you see the unemployment figures, the only thing that’s bringing the unemployment down is the government spending, not private sector spending.

That’s it, also it’s the health budget that’s blowing out.  I mean, it’s just unbelievable.

The NDIS, yeah.


Well, it’s not looking good.

On the question of dividends, James, we’ve got a couple of questions here on that subject so we should probably deal with those while we’re talking about that.  Damien says on the day a share goes ex-dividend the share price in most cases falls.  So, he’s actually got two questions on the question of dividends.  So, the share price falls as the dividend comes out of the stock, so Damien says if I was to short the stock on the days leading up to the ex-dividend date and then close my short position on the ex-dividend date in most cases I’d be buying the stock back at a lower price than I sold it for.  It seems to me that’s pretty obvious and why isn’t everyone doing it, so what am I missing?

He’s missing one small thing.  The reason it falls is it’s mathematically proportionate to the loss of the dividend.  Is it David that the letter is from?


Damien, so Damien you could short it but it would have to fall more than that dividend was worth for it to be a shorting opportunity.  Sometimes they do fall more than the dividend would justify or explain, the absent dividend, but that’s what would have to happen.  That’s why it’s not a lay down misere, if you know what I mean.  Don’t short it unless you think it’s going to fall by more than the dividend.

Got that Damien?  Question two, I also have a question about franking credits.  Say there are two companies, company A and company B.  Both have the same market cap and both of them offer a dividend payment.  Company A pays a 100% franked dividend payment, company B does not offer any franking credits on their dividend payment.  Theoretically should company B’s dividend payment be higher than company A’s?  Why would a company choose to pay franking credits, the benefits to higher income earners seem apparent due to the company’s tax rate of 30% versus higher income earners’ marginal tax rate just below 50%.  But, why do companies care about what their shareholders pay in tax, is it simply to make a stock more attractive to investors, especially those ones seeking dividends?  I suppose the problem there, Damien, is that companies don’t choose to pay franking credits, they’ve either got them or they haven’t got them.

Because they’re Australian operations or they’re not, isn’t that effectively it, that’s the main thing?

Pretty much.  I mean the question is whether they’ve paid Australian company tax.  If they have paid Australian company tax at the full rate of 30%, then there’s a franking credit.  It is true that they can choose to hold onto the franking credits but nobody does that.

Yes.  So, that’s why something like Commbank, Commonwealth Bank, which has no international operations we’re talking about 100% franked, it’s easy for them because they’re taxed here.  They actually do pay a lot of tax in Australia and they get these credits so what else do they do except distribute them under the system.  But, if you were say a global IT company and 50% of your work was here you’d be probably 50% franked, as they say.  So, that’s how it would work.  Good questions, thank you Damien.  I think one of the issues here is a lot of people don’t really understand franking credits and I don’t blame them, it’s terribly complicated.  But, at the end of the day it actually was a reasonably sensible system and no one is getting – it’s not a lurk, I don’t think it’s fair to say it’s a lurk.

It is true that when Paul Keating introduced the system in 1987 he did say we won’t have cash refunds as a part of the system and Peter Costello turned that around, introduced the cash refund in 2000.

That’s right, but there are nearly 20 years and people have built their whole saving plans around these things.

That’s right, and there is an intellectual case for having cash refunds.

There is.

I mean it isn’t true just because Paul Keating didn’t have them in the beginning that they’re not valid, they are valid.

Yeah.  So, is that all the questions on that issue, is it?

On that issue, we’ve got other questions, did you want to do the other questions now?

Well, why don’t we leave them until we talk through our issues of the day because you haven’t had a chance to tell us what you were thinking about the tariff, the tariff issue which of course has gone to the side now because of local domestic issues this week but only 10 days ago it all blew up of course and the tariffs have gone ahead.  Have they really made a difference?

So, there’s been a sequence of events basically since Donald Trump announced after a meeting he had with American steel and aluminium companies he walked out of that meeting, had a press conference with journalists and the press conference went on for ages, ramble, ramble, ramble.  Right at the end of it somebody said so what are we going to do, are we going to have tariffs and he said yeah, 25% tariff on steel, 10% tariff on aluminium.  Well, absolute mayhem ensued and it turns out that really, it’s not a big deal, it’s a big deal for some countries but not for China which is the kind of…

Because it doesn’t export steel to America.

Not that much, a little bit.


It’s a big deal for us.  So, we then kind of galloped off to the Whitehouse with cap in hand saying please Mr Trump don’t make us pay the tariffs, and he said “Oh, alright, okay, you’ve been good.”  So, we’re off the hook apparently because he’s tweeted that.

And Canada and Mexico are off the hook.

Yeah, so it looks like all that was about was kind of an announcement by Trump that the globalists in the Whitehouse, led by Garry Cohn who is the Chief Economic Advisor, had lost.  They had lost.  There’s been a power play going on in the Whitehouse for 12 months between Gary Cohn and the Globalists and the trade warriors led by Robert Lighthizer who’s the US trade representative and Navarro who is the trade advisor.

But, it’s a point in time though isn’t it?  I mean at the end of the day the US introduced tariffs, the US which has been the free trade icon for half a century brought in tariffs and because they’ve done it once they can do it again.

So, Gary Cohn has now quit, he’s gone.  The other globalising person in the Whitehouse, Rex Tillerson, has also gone, he’s sacked.

Multi-national executives, yeah.

So, basically now the Whitehouse, Trump, the administration, is all about tariffs and for the last six months Lighthizer, the US trade representative, has been investigating China under Section 301 of the Trade Act which allows the US to impose tariffs when there’s unfair practices by another party.  What they’ve been investigating is China for IP theft, intellectual property theft.  So, there’s now an expectation that in the next few days they’re going to announce big targeted tariffs against China over IP theft.

How do you do that?

Well, by saying that if you don’t stop stealing our IP all Chinese products coming into America will have a tariff of 50% or whatever.

Which is what he was talking about in the election campaign, 60% he said.

That’s right.  So, he’s been stopped from doing that by people like Gary Cohn and Rex Tillerson, they’ve now gone.

Yeah, the free marketeers.

It’s all now free open slather and so I think we can expect a lot of action on this front now, and the fact is that China does steal IP, they’ve got a point.

Yeah.  The question is how is it accommodated or is it accommodated by trade.

So, what are they going to do about it?  And China denies it of course just like Russia denies poisoning people in Salisbury.  I think we’re in for some interesting times because Russia does seem to have poisoned someone in Salisbury and China is behaving badly, and I reckon there’s going to be a bit of retaliation going on.

Yeah, it could make it very fiery in the markets, couldn’t it, global markets in the weeks ahead if that happens.

The other thing is now the Royal Commission has been going on, have you been watching that?

I haven’t gone to it, I should have, I didn’t get a chance.

You should have, why aren’t you going there?

I have been to them before, I won’t say seen one you’ve seen them all because that’s not true.

Don’t tell me you’re too busy.

Yes.  But the days where a journalist could sort of go up and have a look just out of interest and sit there for a few hours are long gone I’m afraid, Alan.  But, we have reporters there, of course, and I was looking in a fairly detailed way.  First cab off the rank was NAB.  The thing about this Royal Commission is are we going to find out what we don’t already know?  Because we know a lot and we know how bad the banks have behaved.  I didn’t know this one, so in yesterday’s doings it turned that there was four people who were called introducers, now there’s thousands of introducers apparently but an introducer is someone like say this café, let’s say the guy who runs this café comes over and chats to us and we get onto property and he says NAB are doing a great mortgage at the moment and you go over and you take a mortgage with NAB, he gets a commission of 0.04% of the entire value of your house.

How do they know that we’ve done it because of him?

I don’t know, I don’t actually, you must get a call or it must be certified somewhere along the line.  Anyway, it turned out there’s thousands of them.  There was four people and they had got $100 million worth of loans across to NAB on this basis.  Then, on top of that those particular loans were over-indexing, if you like, on bad documentation and on all sorts of issues that were failing all regulatory hurdles.  One of the guys was a gym instructor.

Gym instructors flogging loans to all his people.


Dear oh dear.

So, let’s say the four of them did the same each, we could assume that the gym instructor got $25 million worth of loans over from the gym to NAB, can you believe this, and he was getting a cut on each one.

He can close his gym.

He will close his gym because he’s making all the money from sending people over to NAB, and don’t you love it.  Anyway, so there you are, I can still be shocked.  I suppose it’s good to know you can still be shocked even by the shocking standards of the banks and lots more to come.  CBA are in there today, let’s see what they get out of them.

It seems the banks are starting to get a bit worried about this Royal Commission.

About time they got worried really.

Yeah, Ken Hayne is coming after them, I think it’s great.  He’s nobody’s fool, this bloke, I tell you what.

Nothing like a judge with a couple of fiery counsels, seriously capable.  Have you seen Rowena Orr, the Assisting Counsel, she goes in there like a Dobermann on the banks.  It makes you realise when you see senate inquiries they’re cordial, they’re joking, the politicians aren’t really on top of what the banks are doing.  You put a QC in front of a banker…

And a High Court Judge.

And a High Court Judge, they know how to deal with them, yes indeed.  What else have you got on the agenda?

You’ve got Myer on the agenda, what are you saying about Myer?

Well, because we’ve had so many questions over the last few weeks about Myer and Solomon Lew, etcetera, I just thought people would be interested to hear that the estimate as to how much he has lost on Myer is $63 million to be precise and it came up in a broker’s report on Premier the other day.  That’s how far he is down so let’s say he is really going to be driven to get these changes through on Myer.

And perhaps it’s worth pointing out that it’s not just Solly who’s down $63 million, it’s Premier Investments, which is a whole lot of other people in Premier.

Well a lot of people who would have gone in behind him thinking that he was a good bet as an investment, and he has been for a long time, they’re hit by his dubious strategic move to put $100 million into Myer.  Questionable but maybe he’ll win in the end, we’ll see.

Well, he got hit on the backside by a rainbow when he sold out of Myer originally and it turns out he’s probably not a genius after all.

Yes, we all make mistakes.  Interesting though, as you say, he got his money out of Myer, he might have just put it somewhere else instead of putting it back in.

Well anyway, $63 million is not much for him.

It’s down the side of the couch money for Solomon.  I think that’s it.

You were going to talk something about Bitcoin, I don’t know what.

I was just going to mention that intrigue that Mike Tilley, investment banking doyen is backing…

Mike Tilley.

Remember Mike Tilley?

Yeah, I remember Mike Tilley.

He ran Challenger, etcetera.  He was a kind of superstar investment banker.  Well, he has put a hell of a lot of money into a cryptocurrency exchange called Independent Reserve, I think it is, local Australian cryptocurrency exchange.  Though Bitcoin might be dropping, there’s plenty of believers out there on cryptocurrency still.

There certainly are, indeed.

So, how about the questions, what have we got?

Peter says the federal government lowered their guarantee on deposits and no one seemed to care, at the same time the debt ceiling was raised half a trillion dollars.  I’m getting worried that all my savings over the past five or six years now are getting to the point where there’s going to be a US style meltdown and that one of our Australian banks could fold.  What do you think are the chances of this outcome in particular, Commbank?  Well, I don’t think Commbank is going to fold, Peter.

I think if Commbank is gone we’re all gone.  I mean, it’s too big.

We’re going to be banging rocks together to start a fire, Peter.

We’ll be in the hills with a gun and a couple of cans of beans if Commbank goes over.  So, that’s the thing, too big to fail and a splendid example of it really.

Well, yes.  I think that the banks are coming into some good times probably actually with blockchain and cryptocurrencies, they’re going to do well out of all that I think.


And I don’t think they’re going to be under threat at all.

There you go, watch the cost to income ratio on the big banks.

Yes, that’s right.  I mean, I suppose Peter is talking about a big meltdown, a US style meltdown, collapse of the economy.

Well, we’ve got four banks that completely dominate.

You can find plenty of people who are kind of predicting Armageddon.

Yeah, you can find them any day.

They’ve been predicting Armageddon forever.

That’s right, we’re not predicting it.

Tim says great show, I listen every week, I am a medical doctor with a developing interest in personal finance after getting the feeling that some finance professionals see doctors as easy money.

And I bet they do.

I’m sure they do.  Alan, I know that ETFs are not your favourite investing tool but I wondered whether you or James could clarify something.  I understand that when buying you are purchasing amounts of each of the listed companies on the US stock exchange, or presumably any stock exchange, proportional to their market cap and therefore this closely matches the index market return.  However, when purchasing the ETF of the same index fund isn’t there an additional demand/supply market force that the ETF is subject to purely by being traded on the ASX that would impact on the ETF price and therefore pull it away from the average market return on the index?  If so does the ETF match the index.  The answer, Tim, if I can jump in, is that it always matches the index because they actually issue new shares and buy new assets whenever anyone buys and sells.  So, the demand and supply does not affect the price at all.  The price always trades exactly the same as the index.

But, I’m guessing here now, but he’s saying let’s say you had a Wall Street index fund, American index fund, American shares fund number one and it was listed on the ASX, and for some bizarre reason the ASX fell 50% tomorrow and it fell 50% tomorrow, he’s saying can’t it trade in Australia autonomously from its underlying value.

No, the ETF will always match the index and if you buy shares in that ETF then they have to buy an equivalent amount of the shares in the market, and if you sell, likewise.

Yes, but if it’s listed on the Australian exchange it can move around on the fortunes of the Australian exchange, the vehicle, it can.  What he’s saying, I’m guessing here but if I’ve understood your question right, doctor, then yes it’s true, his point is true.

What, an Australian ETF of the US markets can move separately to the US index.


Is that right, you think that’s right?


Okay, there you go.

Because it’s trading on the…

There wouldn’t be much in it.

No, but it can move autonomously from the underlying value of the American shares.

But, if the US market is going up and the Australian market is going down then the US ETF that’s listed on the Australian market will be going up, not down.

It is very likely to reflect it but not perfectly, that’s his point, does it have to do it perfectly.

Maybe there’ll be 1% in it.

I know, it sounds like you’re getting a very good grip on personal finance there and yes, ETFs are useful at the right time and the right way.

The reason, Tim, that I am not that happy about ETFs is that I don’t think investing in companies according to their size is a very good idea.  However, there are some ETFs that I think are good or worth looking at that are particular sectors or a particular way to invest in an overseas market, to do that through an ETF is a good idea on the whole.  If you want to invest in America an ETF of Nasdaq for example will give you exposure, if that’s what you want, to Apple, Amazon, Facebook, Google.

That you just cannot get here, yeah.

But it’s difficult to do that, so you can either buy those companies or you can buy the ETF of Nasdaq and that’s not a bad idea.

Yeah, and they have a simplicity too on the foreign exchange side.

And I think that’s it for questions.  Hang on, there’s one over the page here from Joey.  Joey was reading a discussion about how you can learn about the diversification of an ETF.  A lot of the responses said that the approach is a lot of work and for not much meaningful information mainly because where a company is based doesn’t tell you about the economics and sectors it depends on to do business and stay profitable.  Is there another way to get an understanding of portfolio diversification across economies and sectors?  Keep up the good work.  Okay.

I want to see what he means.  Again, I am guessing.  If you buy an American ETF you might have a whole pile of global multinationals in there so if you had Apple for instance it’s not purely an American play, it’s not purely a domestic American play it’s a global play.  So, he’s saying can you get a more refined view than that and my quick answer is it will be very hard, actually.  Unless you really do your homework and buy the stocks one by one.  So, if you buy some American only company that’s entirely domestically focussed then you can do it.

I suppose it depends, Joe, on what sort of information or understanding you required.  He’s saying is there another way to get an understanding of the portfolio diversification across economies and sectors.  I’m not sure what you mean, Joe, by understanding of portfolio diversification.  I mean, there are theories about it which you can look up and there are various portfolio construction theories about what you should be doing.  A lot of it has to do with your own personal kind of inclinations that leads to what you want to diversify into.

And what sort of risk you want to take.  Well, the more you read the better, I think, as a general rule.

Well, indeed that’s true.

Okay, our producer has said he wants to understand what’s in the ETF, yes, well what’s in the ETF is what’s listed on the index that the ETF follows.  So, you can’t find out more than that I’m afraid, that’s all you can get.

The best thing to do is to go to the ETF website.  All ETFs have their own website and they’ll show you what they’re doing.

They do to a degree, they show you the big order, their main stuff.

Sure.  I mean, for example Beta Shares, you got to the Beta Shares website and they’ve got ETFs, for example, that invest in robotics, they’ve got a robotics ETF which invests in global companies that are engaged in robotics and you can look at what stocks they’ll list, they list the stocks.

They name them and they show them in their proposals.

That’s right, they do.

There you go, well that’s a good example.

So that’s the same with all of the ETFs that they’ve got and they’re kind of a range of kind of exotic ETFs which are a good idea for diversification, I think.  It’s so that you don’t have to choose stocks because you always get it wrong, to speak personally.

We’ll leave it on that note.  You don’t always get it wrong.  As long as you get some right, Alan, and you get more right than you get wrong, that’s the thing.

So, don’t forget everybody you can subscribe to The Money Café on Apple Podcasts and listen to us get it wrong, or your app of choice.  While you’re there it’s helpful to leave a review or a rating, we love reviews and ratings just like Uber drivers, give us five stars.  Also, send in a question and we’ll answer it on next week’s episode.  You can tweet us your thoughts, just use the hashtag The Money Café or e-mail us at hello@theconstantinvestor.com.  Until next week, I’m Alan Kohler, the Publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

Talk to you next week.