The Australian Labor Party may be slightly out in front when it comes to the polls, but its fiscal policies are going to get a rigorous public airing. Labor’s negative gearing reforms faced criticism from many sides of the political sphere but did receive some strong backing from other sectors.

Next on the list is its proposal to start changing the way that tax benefits apply to dividends, a move that has caused fund managers to wonder how this could damage investors’ appetites to keep pushing dividends as a potential income source.

Mark Freeman, Managing Director of the Australian Foundation Investment Company (AFIC) worth $7bn and a collection of associated funds worth an extra $1.3bn, warned of the ‘big risk’ that these changes pose to investors.

Labor’s policy is to no longer allow taxpayers to receive cash refunds if they are getting tax breaks on dividends that already take their total tax bills to less than zero. The opposing argument is that this does not encourage responsible investing and stymies the potential for the Australian government to recoup taxes on high-performing investments.

Freeman noted that these reforms would be most problematic for major banks and other companies that are committed to fully-franked dividends.

He said that Labor’s proposal would compound the issues that the banks are already dealing with. These include changes to regulations in the wake of the Royal Commission fallout, a drop in profit margins and a plummeting real estate market. Freeman believes that plenty of economic conditions are causing concern without throwing something else into the mix.

Labor is pushing for the changes, as it believes that it can raise an additional $11bn for federal coffers over four years. This figure is substantial enough for the party to take the risk of destabilizing a capital investment mechanism.

Freeman discussed Labor’s suggestion when announcing the results of one of his funds and indicated that it could make him ‘reconsider’ how he approached investing with banks that offered fully-franked dividends where the company has already paid the tax. If taxpayers cannot claim it back beyond a certain point, then some investors may deem the policy to be too punitive overall.

Additionally, Freeman spoke of how ‘franking is still going to have some value, it’s just the refundability’ but noted that the ‘total risk-reward dynamic has to be looked at in a different light.’

With Labor leading in the polls for now, it seems that there could be further instability ahead for the major banks, which are still tending to open wounds after a series of scandals unearthed by Commissioner Kenneth Hayne and the Royal Commission inquiry. If the Liberal Party is unable to counter Labor with a manifesto that appeals to voters as much as it does to lenders, then there is a very real chance that the culture that has underpinned banking growth in Australia for the last decade could be set to change.

Analysis that Citigroup released last week suggested that the loss of multiple billions of dollars from banking margins could occur if franking credits change.