Wilson Asset Management

The retrospective nature of the sweeping proposal, which centres on the notion of using capital raisings to fund franked dividends, has put it on a collision course with the nation’s powerful bank regulator.

In mid-2020, as the Covid crisis deepened, Australian Prudential Regulation Authority chairman Wayne Byres wrote to the nation’s bank bosses, urging them to take a conservative position on paying out dividends. He said in the face of heightened uncertainty banks should consider sources other than core capital to help pay dividends. That year Westpac undertook a $2.8bn raising while NAB made a monster $3.5bn raising. Both banks paid fully franked dividends after the raising.

“For 2020, APRA expects (banks) will retain at least half of their earnings, and actively use dividend reinvestment plans and/or other capital management initiatives to at least partially offset the diminution in capital from distributions,” APRA’s Byres told the nation’s banks in July of that year.

The technical nature of franking changes would normally be glossed over, but they go to the heart of Labor’s disastrous 2019 electoral loss, when a proposal to scrap the franking credits regime spooked many investors. Influential fund manager Geoff Wilson led the charge on the previous battle over franking credits and he has signalled he is prepared to fight loudly against the latest changes. He has requested more time for Treasury to take feedback on the proposal, saying he has hundreds of shareholders from his listed Wilson Asset Management family of funds wanting to put in a ­submission.

“This legislation is definitely bigger than everyone thinks and it will have a dramatic, detrimental effect on the capital markets,” Wilson said.

Another fund manager, Angus Gluskie, who is chairman of the Listed Investment Companies & Trusts Association, told Treasury the proposed legislation as drafted would appear to ­“inadvertently catch many ­thousands of situations of legitimate company operation and could ­accordingly delay or significantly discourage the normal processes of capital raising, investment and economic growth within ­Australia”.

Reignite fears

Tinkering with franking credit policy only serves to reignite fears among self-funded retirees that Labor is looking to shut off the franking credit regime by stealth.

Treasurer Jim Chalmers has denied this, saying the previous policy is long buried. He also points out the proposals were first released by the then treasurer Scott Morrison in the 2016-17 Mid-Year Economic and Fiscal Outlook. Chalmers also argues the changes are technical in nature and were a matter of cleaning up the mess of the previous government that never got around to introducing the rules it included as part of a budget document.

However, six years in the markets is a very long time and Chalmers does have a say on the retrospective nature of the rule changes – or whether to bring them back at all.

At the time the measures were forecast to raise $10m annually for Canberra. But with the tens of billions of dollars raised by corporate Australia as funding markets were shaken by the Covid crisis, the impact would be much bigger.

Some of these Covid funds found their way back to investors in the form of fully franked dividends, which means some investors, including bank shareholders, could be looking at retrospective tax payments.

The proposed rules apply to all distributions paid after December 2016, according to the draft legislation. They say this was made clear when they were announced.

The draft legislation aims to prevent companies from “unlocking” franking credits by using capital raisings to fund share dividends. The draft legislation says the changes are an integrity measure to prevent companies from manipulating the system to obtain inappropriate access to franking credits. It sees capital raisings as an “artificial arrangement” to fund the payment of franked distributions to shareholders, but it doesn’t distinguish between acceptable activities and the loophole it is trying to close.

The catch-all nature of the planned changes could force boards to think twice about fund raisings. The draft rules say even if all of the funds raised by a company are quarantined and used for a specific purpose, “this may serve to free other funds to be distributed that would otherwise have been required to be used for that purpose”.

Here the cash from the raising would still be considered as funding the dividend, which would have broader implications. The rules in the draft form also apply to underwritten dividend reinvestment plans or an underwritten rights issue.

With talk of a global recession washing over Australia, cost of living, inflation and higher rates, Chalmers would be better off keeping investors in his corner for the coming financial storm rather than fighting a battle he didn’t start.

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