One of the nation’s best known funds managers has taken a swipe at the government for failing to protect mum-and-dad investors from franking credit losses associated with changes to the company tax rate.
“This is another sign that the government is coming after the imputation system,” Wilson Asset Management chairman Geoff Wilson said.
“The bank tax was the first and now this retrospective change will trap franking. Both measures will impact individuals ability to self-fund their retirement.”
Mr Wilson is referring to the fact that as companies transition to the lower rate of 27.5 per cent, investors will suffer franking credit losses of 2.5 percentage points because tax was paid at 30 per cent.
Either that or the credits will become “trapped” in the company.
The mismatch is a deliberate feature of the Enterprise Tax Plan.
As the Financial Review reported last week, some listed investment companies have had to revise downwards the quantum of dividends already paid to shareholders because of eligibility for the lower tax rate.
ECP Asset Management chief executive Manny Pohl said one of his LICs, Flagship Investments, had twice in the past year issued statements franked at 30 per cent, which was correct at the time.
But because the LIC meets the turnover criteria for being a small business, he has been preparing to send amended statements detailing franking at 27.5 per cent.
Those statements are at the printer but could have to be changed a third time because the government intends to introduce legislation that will probably exclude companies holding passive investments such as Flagship Investments from the lower company tax rate.
“This kind of help I do not need,” Mr Pohl told the Financial Review, a reference to the fact the government has sold the changes as pro-business, particularly smaller business.
“My world has been a nightmare for the last week.
“Unless they have decided to destroy value to shareholders, I don’t think they’ve thought through it and the administrative ramifications are a nightmare.”Nobody knows where they sit with regards to their franking credits and this change affects mostly mums and dads in Australia, and 2.5 per cent disappears into the ether in Canberra, never to be seen again.”
Mr Wilson’s Century Australia Investments Limited has written to shareholders to say the LIC fell under the $10 million threshold and therefore had a corporate tax rate of 27.5 per cent for the year ended June 30 2017.
“The new retrospective tax legislation means a company will frank its dividends based on the prior year’s aggregate turnover rather than the current year’s turnover this could result in companies having a different tax rate to their franking rate,” Mr Wilson said.
“This will definitely be the case when there is a reduction in corporate tax rate resulting in franking being trapped and significantly disadvantaging investors who support small and medium sized companies in Australia the life blood of the Australian economy.”
Mr Wilson is already angry at the government’s bank levy. “It is not a tax on bank profits so does not result in franking credits for shareholders and the budget papers imply that the levy will be deductible which will reduce the corporate tax intake, thus reducing franking credits for shareholders,” he said.