By Elizabeth Knight
The overarching description of Jim Chalmers’ first budget was “safe”. But one element was way further out on the risk curve – tinkering with Australia’s sacrosanct dividend imputation system.
Labor’s attempt during the 2019 election to fiddle with franking credits was met with a tidal wave of grey resistance and declared a major factor in its electoral loss.
This time the changes in the federal budget, which eradicate the ability of companies to distribute franking credits to shareholders via off-market share buybacks, do not appear as intimately impactful to the retirees who depend on dividend income.
It’s a hot-button issue nonetheless.
For companies, it enabled the off-market buybacks to be offered at a discounted price for which shareholders would be compensated by receiving franking credits.
In theory, the blowback should be less intense.
The government is selling the policy as a means of closing a loophole in the dividend imputation system, which the treasury boffins justify as a means to save $550 million.
This would be a costly measure for small shareholders, in particular, if companies continued to use off-market buybacks.
The chances are that this mechanism of capital management will be abandoned by the large companies such as banks and resources groups that have used it frequently in the past.
For Labor, it represents the second attempt since elected this year to chip away small pieces of the franking regime.
Its first attempt a few months back seemed pretty minor. It sought to stop companies from raising capital from shareholders and then handing it back to them via franked dividends. Even after declaring this measure retrospective, it was set to raise only $10 million.
But Wilson’s spearheading of a campaign against even this move has resulted in disproportionately loud backlash.
The combined measures speak to a willingness by the government to rein in what it must view as legal exploitation of the dividend imputation scheme introduced by Paul Keating in 1987.
Add it to Labor’s failed attempt in 2019 to ban refundable franking credits (which provide tax credits to shareholders who were not actually paying any tax) and there seems to be a pattern forming.
Wilson certainly sees it as the beginning of the dismantling of the tax imputation system – one that was designed to allow shareholders to receive dividends tax-free to the extent companies had already paid tax on profits.
More simply – avoiding the payment of double taxation on profits.
For decades, it has served as an incentive for people to invest in shares and has encouraged Australian companies to raise money through equity rather than debt.
It has also encouraged Australian companies to pay out larger portions of their profits to shareholders.
Those tax franking credits generated by tax-paying companies can build up inside the companies if they don’t pay out all their profits in dividends.
But dividend payout ratios typically sit at between 50 per cent and 90 per cent – thus there are billions of dollars of franking credits sitting inside Australian companies.
These will become increasingly marooned if the government further cuts the routes for companies to distribute them.
There is no hay to be made lobbying the government to go easy on companies such as banks and BHP or to give them easier ways to distribute profits or enhance their cost of capital.
But fighting any moves that are seen to disadvantage small shareholders, particularly retirees, can get traction.
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