FMG founder Andrew Forrest surprised the market by declaring a “special” second-half dividend of 60¢ a share, payable on June 24. This is a smart strategic move because it means FMG shareholders hit by Labor’s changes can get the fully franked dividends before the law changes at the end of the financial year.
It is distinctly possible other companies will join the dividend franking pull- forward strategy if Labor wins on Saturday.
The FMG dividend declared on Tuesday is, in effect, a downpayment on the final full-year dividend, which is normally declared with the release of full year financial results in August and paid in October. Analysts have differing views over whether FMG will declare another dividend payment in August or leave it as is.
Forrest’s move, which will result in him picking up $654 million in tax effective cash, is similar to the one engineered by Westpac chairman Lindsay Maxsted earlier this year. He decided, with the support of the bank’s board, to pull forward the payment of Westpac’s 94¢ interim dividend from early July to June 24.
ANZ Banking Group and National Australia Bank showed no imagination whatsoever and simply stuck with their usual July dividend payment dates of July 1 and July 4 respectively. This was a slap in the face for shareholders who will be negatively affected by Labor’s franking credit changes.
The dividend franking changes are having a wider impact on investors as noted by Wilson Asset Management chairman Geoff Wilson, who has been funding a grassroots campaign against the franking credit changes.
On Tuesday Wilson sent a letter to shareholders in the stable of six WAM listed investment companies. He noted the decline in the average premium to net tangible assets for LICS between December 31 and May 3. He said this may have been caused by uncertainty over dividend franking laws.
LICs could be significantly restructured under a Labor government. It may make more sense for LICs to become trusts, which must distribute all of their income. Tax is then payable in the hands of investors.
Shadow treasurer Chris Bowen’s fact sheet for his franking policy says “imputation credits for individuals and superannuation funds will no longer be a refundable tax offset, and will return to being a non-refundable tax offset consistent with the tax treatment of most other tax offsets”.
“Cash refunds will not arise if excess imputation credits exceed tax liabilities,” the fact sheet says. Pensioners will be exempt from the policy.
It is generally accepted that Labor’s dividend franking policy will lead to an uneven playing field because industry super funds will be able to utilise franking credits across a pool of members and distribute excess franking credits.
Boost for industry funds
Industry funds, which are already enjoying record inflows because of the fallout from the Hayne royal commission, will enjoy even stronger flows because of outflows from retail funds, according to Siraj Ahmed, an analyst at Citi.
He says retail super funds, which typically have older members with larger balances, will be tempted to shift to industry super funds. The other prime cohort likely to shift because of the franking credit changes are the 210,000 self-managed super funds likely to shift to industry funds or retail super funds to utilise excess franking credits.
One of the unintended consequences of the franking credit changes is the pressing need for an increasing number of Australians on lower incomes to seek financial advice.
This is a serious problem because the Hayne inquiry has set up a regulatory system that has made the cost of face-to-face financial advice prohibitive. This leaves intra-fund advice, which is offered by industry super funds, and general advice as the only realistic options apart from robo-advice.
On the surface robo-advice, which is goals-based advice tailored to various age-based segments using computer software, seems reasonable. But the reality is people on low incomes have less need for advice on managing money and a much greater need for advice on managing liabilities and the cost of living.