Wilson Asset Management

By Paulina Duran

Australian banks are relieved by a Senate committee call that the Albanese government reconsider a key element of its crackdown on franking credits, as tax law experts agree the proposed bill needed significant changes.

The banks had sought amendments to clarify the scope of the proposed law that prohibits franked dividends funded by capital raisings, disallowing their payment if companies raise capital before or after a dividend payout.

“The Australian Banking Association welcomes the Senate committee’s recommendation to amend parts of schedule 5 (franked distributions funded by capital raisings) of the bill to deal with potential unintended consequences,” a spokeswoman for the peak banking body said.

The Senate inquiry – chaired by Victorian Labor Senator Jess Walsh – into the government’s Treasury Laws Amendment Bill said the proposal to target franked distributions funded by capital raisings should be “clarified”.

“The committee recommends the Australian government consider opportunities to clarify schedule 5 of the bill to ensure it appropriately targets the identified behaviour and addresses feedback provided to the committee,” said the report, released on Friday.

The report, which was dissented by Coalition senators, also recommended schedule 4 of the government’s bill, which prohibits franking credits in off-market share buybacks, be “passed unamended”.

Treasury expects the proposed changes would raise $550m from disallowing franking credits on off-market share buybacks, and $10m a year by stopping companies paying franked dividends funded by capital raisings.

“The committee is reassured that the proposed amendments will improve the integrity of the imputation system by ensuring companies are unable to enter into contrived arrangements to artificially distribute excess franking credits,” the report says.

But King & Wood Mallesons tax partner Tim Sherman said there would be a “significant” need for guidance from the Australian Taxation Office as to how the measures would operate.

Mr Sherman added that the franking credit crackdown on off-market buybacks would effectively prohibit their use by listed companies.

“The report has recognised that there is a level of misunderstanding about the rationale and application of the proposed measure (prohibiting franked distributions funded by capital raisings),” he said.“We continue to believe that the drafting of the measure needs significant improvement. In its current form, we are concerned that it could have an unintended application in relation to many ordinary commercial arrangements, such as dividend reinvestment plans. We are hopeful that, with appropriate amendments, the scope of the measure could be more accurately described so that it would not impede normal commercial arrangements.”

Financial Services Minister Stephen Jones said the government would “consider the committee’s recommendation to clarify the capital raising measure to ensure it appropriately targets the right behaviour”.

The two Coalition members of the Senate committee dissented the report, calling for parliament not to pass any of the franking changes and warning the $10m gain from targeting franked distributions funded from capital raisings posed a much bigger “revenue risk”.

Liberal senator Andrew Bragg accused the government of breaking an election promise with the new franking laws and said the changes would “damage investment levels”.

Wilson Asset Management founder Geoff Wilson, who has campaigned against the proposals, said the legislation was “flawed” and needed to be clarified. “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,” he said.

“It is imperative now that the government steps up and abandons schedule 5 (prohibiting franked distributions funded by capital raisings).”

Gilbert & Tobin tax partner Julian Cheng welcomed the report’s recommendation to clarify the proposed laws, but said it was unclear if they were even necessary, “given existing integrity measures in the tax laws”. “It remains to be seen what form this clarification will take,” he said, adding amendments should be introduced to address key concerns. “These include … the uncertainty for shareholders in listed companies where special dividends are paid in the context of public market transactions.”

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