By John Kehoe

Concerns the Albanese government’s crackdown on franking credits could accidentally hit banks and start-up companies has led a Senate committee to recommend the tax change be narrowed.

Assistant Treasurer Stephen Jones has proposed two measures to curtail franking credits connected to capital raisings and off-market share buybacks to save the budget an estimated $600 million over four years.

To avoid double taxation, franking credits can be released from companies to shareholders for corporate tax already paid, often benefiting retail investors and superannuation funds.

Companies, shareholders and tax lawyers were most concerned about the move against out-of-cycle franked dividends funded by capital raisings to release excess franking credits on company balance sheets.

Banks warned the broad drafting of the legislation that equity capital raisings and dividend reinvestment plans could be “deemed unfrankable”, despite the activity being required to meet the banking regulator’s capital rules to make the big lenders “unquestionably strong”.

Moreover, fast-growing companies reinvesting profits into investment and not immediately paying out dividends could be disadvantaged because they don’t have a track record of consistently paying shareholders.

While the Labor-led Senate committee recommended the bulk of the changes proceed, it suggested the Treasury bill be refined to respond to industry feedback that the capital raising measure could inadvertently hit some companies.

The Senate committee, chaired by Labor’s Jess Walsh, in a report on Friday said the government should “clarify” the legislation “to ensure it appropriately targets the identified behaviour and addresses feedback provided to the committee”.

Labor’s proposed changes are more modest than its far bigger proposed crackdown on $11.4 billion of refundable franking credits that contributed to its 2019 election loss.

A dissenting report led by deputy chair and Liberal senator Andrew Bragg said Labor had broken an election promise not to touch dividend imputation.

Senator Bragg said the proposed changes would advantage large companies over small companies, force companies to take on more debt instead of equity and Treasury’s revenue costing was not reliable.

“There is no problem in the market to solve and it will damage the franking system because the test is so poorly drafted,” Senator Bragg said.

Mr Jones called on the Senate to pass the reforms to prevent “abuse” of franking credits, and also to strengthen the powers of the Tax Practitioners Board also included in the legislation.

“The government will consider the committee’s recommendation to clarify the capital raising measure to ensure it appropriately targets the right behaviour,” he said.

“We welcome both industry and the committee’s strong support for Labor’s off-market share buyback measure and support for the government’s reforms to the Tax Practitioners Board.”

Geoff Wilson, of Wilson Asset Management, said he was pleased the Senate had acknowledged changes to the capital raising proposal were required, but the measure should be “abolished” entirely to avoid unintended consequences.

“There was never any doubt that this piece of proposed legislation was flawed, and following a thorough analysis and evidence given by experts, the Senate Economics Committee clearly agrees that it needs to be clarified,” he said.

“I hope now that the government thinks twice about legislating before considering the significant unintended consequences tinkering with the Australian franking system will have on Australian companies, Australian shareholders, and the Australian economy.”

Mr Jones said the accompanying Tax Practitioners Board changes were overdue and delayed by the Coalition for years in government.

“They will strengthen the TPB, and help it better respond to rogue tax agents like we’ve seen with PwC,” Mr Jones said.

The government in September proposed stopping companies paying shareholders fully franked dividends that are funded by capital raisings after the Australian Taxation Office raised concerns following a Tabcorp transaction in 2015.

The measure, estimated by Treasury to save the budget a modest $10 million a year, was originally proposed by Scott Morrison as treasurer in 2016 but was never followed through.

Separately, the government in the October budget proposed closing a loophole used by some of Australia’s largest companies to “stream” franked dividends to low-tax shareholders such as superannuation funds.

The integrity measure would align the tax treatment of off-market share buybacks undertaken by listed public companies with the treatment of on-market share buybacks.

For more than a decade, big companies have been buying back their shares from shareholders off-market, often at a discount to the sharemarket price.

The companies have compensated the investors for the price shortfall by streaming franking credits as a large portion of a dividend and capital return to shareholders.

The strategy is, in effect, a capital return, dressed up as a franked dividend, enabled by a share buyback.

About 32 listed companies have completed 47 such transactions since 2006-07, according to Treasury. These include BHP, Rio Tinto, Commonwealth Bank, Westpac, Woolworths, JB Hi-Fi, Metcash and Caltex.

Some off-market share buybacks have been as high as between $6 billion and $8 billion, and some companies have resorted to this several times.

Licensed by Copyright Agency. You must not copy this work without permission. 

Back to blog