The credits, also known as imputation credits, are a form of tax deduction that can be used to reduce income tax paid on dividends or potentially can be received as a tax rebate. This tax reduction cannot, however, be used across all asset classes.
Ms Moran said that FIIG recognised that franking credits were here to stay but investors needed to look beyond the after-tax yield to the underlying risk of the investment.
“With franking credits it really takes the focus away from the risk assessment. It gives people the wrong impression,” Ms Moran told InvestorDaily.
“[It is] one of those things that promotes a higher-risk asset class [and] we have a lot of that money accumulating in superannuation and a lot of that is in high-risk assets.”
FIIG, which issues fixed income securities to clients, believes franking credits inflate the actual returns that equities give over bonds, which is the wrong impression to give to those who are about to retire.
According to the Organisation for Economic Co-operation and Development (OECD), Australia has one of the lowest bond allocations amongst its pension funds relative to other parts of the developed world.
***Clarification***
An earlier version of this article stated that FIIG was calling for the abolition of franking credits. This was incorrect and the article has now been amended.
