By Geoff Chambers
Wilson Asset Management chair Geoff Wilson, who manages $5bn in funds for 130,000 retail investors, has warned the Albanese government that dismantling the country’s franking credits system will force companies to invest overseas and threaten the loss of jobs.
Mr Wilson, whose campaign against Bill Shorten’s policy to ban excess franking credit refunds contributed to Labor’s disastrous 2019 election defeat, has launched a new push railing-against clampdowns on companies paying out fully franked dividends.
In December, Mr Wilson sent letters to 227 MPs and senators raising concerns about two government measures he says targets franking credits and will “impact the stability of the Australian economy” over the long term.
The fund manager – who met with Labor, Coalition, Greens and crossbench MPs on Wednesday – told The Australian: “What really concerns me is I don’t think (Treasurer) Jim Chalmers and (Assistant Treasurer) Stephen Jones understand the legislation.”
Mr Wilson, whose shareholders are dominated by “mum and dad” investors and self-managed super funds, said franking reforms implemented by Paul Keating had been “exceptional” in encouraging companies to pay tax in Australia, boost investment and employ more people.
“We saw back in 2018-19, that Labor proposed an inequitable and unfair franking strategy. The Labor strategy back then was to stop individuals from getting the franking,” Mr Wilson said.
“What it appears now – the Labor strategy is to stop companies from paying the franking. This is unfortunately breaking promises that both Jim Chalmers and Anthony Albanese made before the election.
“They said they wouldn’t do anything on franking. In terms of credibility, it concerns us significantly.”
Mr Wilson’s role in prosecuting the Coalition’s “retiree tax” attack during the 2019 election campaign remains a scar for senior Labor ministers, who believe the fund manager’s crusade is driven by “self-interest”.
Labor’s 2019 plan, which intended to increase revenue by $58bn over a decade, focused on ending cash rebates for excess franking credits for shareholders who pay little or no income tax. Following Labor’s defeat, Mr Albanese jettisoned the policy despite internal pressure to keep it on the books.
Under current ATO rules, when a company pays or credits dividends which have been franked, investors are entitled to a franking offset for the tax the company has paid on its income. The offset covers or partly covers the tax payable on dividends.
In the October budget, the Albanese government flagged it would raise $550m by aligning the “tax treatment of off-market share buybacks undertaken by listed public companies with the treatment of on-market share buybacks”.
Mr Wilson said a second measure, slated to raise $10m-per-year, was being designed to stop companies paying dividends and restrict access to franking credits for individual shareholders.
Mr Jones argued that the changes “will close an unintended loophole that allows large corporations to effectively gain a taxpayer subsidy for off-market share buybacks”.
“This subsidy benefits a very small number of large corporations at a cost to the taxpayer, and distorts their capital management decisions at the expense of mum and dad investors,” Mr Jones told The Australian.
“Franking credits were created to prevent the double taxation of dividend earnings. That purpose will remain completely intact,” he added. “This makes no change to the fact that companies can still issue dividends that attract franking credits.”
Mr Wilson said the measures, which require legislation, seem “benign but when you get down and look through it in detail and work out the unintended consequences it can be significant”.
“This will encourage Australian companies to look for ways of paying the least tax in Australia as possible because they’ll end up with excess franking credits. It will encourage Australian companies to invest overseas,” he said.
“It’s really about stopping companies from paying fully franked dividends if it was associated with any capital being raised. The concerning thing for us is just how broad that is.”
Mr Wilson, whose average shareholder is aged between 68 and 70, said Labor’s crackdown would “change corporate Australia’s behaviour” and undermine Mr Keating’s 1980s reforms, which shielded local companies “vulnerable to being taken over by international players”.
“Because of the franking system, our valuations have increased significantly,” he said.
“The cost of capital for Australian companies has declined significantly since franking came in.
“Normally it’s cheaper for a company to borrow money. So, they’ll have a lot of debt. But Australian companies are under-geared globally.
“What it’s meant is corporate Australia is in such a good position that when tough times come and globally we see recessions (the country is insulated).”
Mr Wilson said there was a real risk that $86bn per year in fully franked dividends could become “landlocked”. “The only way that can get out into shareholders’ hands, where it should be, is if those companies borrow $86bn, and that’s not going to happen. Therefore, that franking is lost.”
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