Wilson Asset Management

By Geoff Wilson

It will also encourage large companies to minimise the tax they pay in Australia and limit the ability of local companies to restructure.

Ever since launching its latest salvo against the dividend imputation system last year, Labor has insisted its intended targets are the ‘‘big companies’’ and ‘‘big institutional investors’’ that exploit Australia’s tax system.

Unfortunately, that is untrue. By attempting to crack down on franking credits connected to capital raisings, the government is instead handing those same big companies a significant competitive advantage over their small to medium-sized rivals.

The changes to the franking credit system proposed by Treasury allow companies to fund their fully franked dividend distributions through borrowed money, but not through capital raisings.

This will encourage a return to the bad old days, when companies were fuelled by debt rather than equity.

And which companies are likely to have better – and cheaper – access to debt funding? It’s the very same big companies that Labor claims to be targeting.

Large established companies have the means to take on external debt to pay out fully franked dividends from their franking reserves, which will give them the upper hand.

Each year, about $36bn of tax paid by companies is not paid out in fully franked dividends.

Instead, this tax accrues in the companies’ franking accounts, to be paid out in the future.

If the franking can no longer be paid out to their shareholders, the incentive to pay the tax diminishes.

Australian companies would only need to minimise their tax paid by 0.13 per cent in the first year to render the proposed legislation – and its estimated $10m in savings per annum – uneconomical.

While Treasurer Jim Chalmers and his Assistant Treasurer Stephen Jones can’t seem to grasp the likely repercussions of their franking attack, other politicians have more foresight.

On March 9, as the Senate referred Treasury’s tax law amendment bill to the chamber’s economics committee, Greens MP Max Chandler-Mather sensibly questioned whether the proposed legislation could unintentionally hand big businesses an unfair competitive advantage over smaller businesses.

The answer to that question is clearly yes.

A small mum and dad business, generating $1m a year, which still needs capital to grow, is hardly going to seal a debt deal on the same terms as BHP – if it is able to borrow the money at all.

Even putting aside this injustice, encouraging companies – large or small – to take on risky debt, at a time when the Australian economy is reeling from significant global uncertainty and rising interest rates, smacks of poor economic management.

The franking system was introduced by Paul Keating in 1987, before being altered by John Howard in 2001, to allow the credits to act as a refundable tax offset.

In the decades since, it has underpinned the stability of the Australian economy by encouraging companies to fund themselves with equity.

It is little wonder then that Labor’s attack on franking credits has been dubbed the “de-Keating” of Australia or the “Retirement tax 2.0”.

Chandler-Mather’s other cause for concern is whether the Australian Taxation Office can actually make a reasonable ruling that a company’s fully franked distribution is linked to a capital raising.

As we all know, money is fungible. Companies that embark on both a debt and equity raising at any time, and then make a distribution, run the risk of falling foul of the new legislation on both counts.

The Australian Taxation Office has been handed a loaded gun, with a catch-all remit.

Chandler-Mather says he looks forward to seeing these issues get an airing in the Senate inquiry.

I share the Member for Griffith’s sentiment. This legislation needs to be stopped.

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