By Geoff Wilson
We have been publicly fighting for the preservation of Paul Keating’s franking system since Labor’s proposed changes in March 2018. For the sake of every Australian, let’s hope and pray the government comes to its senses and abandons the current changes, which industry and taxation experts, lawyers and academics all agree are flawed.
The Senate economic committee, chaired by Labor senator Jess Walsh, has clearly heard us all.
Now it is time for the government to show leadership by stepping up and abandoning this deficient proposed legislation, as the unintended consequences are just too high.
Assistant Treasurer Stephen Jones seems to agree. “If there are having unintended consequences, we’ll look at that.”
He doesn’t have to look too far.
I’m currently in London, meeting with fund managers and business leaders.
Two things come up repeatedly – Australia is the envy of London’s investment community, and the Australian government’s plans to fiddle with franking will be a disaster for Australia.
The lesson the people I speak to keep pressing is this: Britain once had a structure similar to our dividend imputation system, but unfortunately the changes their government made helped downgrade London’s reputation as a financial centre, forced their greatest companies to move offshore for funding and have seen the nation’s retirement savings flee for foreign markets.
Here’s a quick history lesson: in 1973, Britain implemented a system of company taxation called the Advance Corporation Tax (ACT).
Like our own franking credit system, the ACT aimed to prevent double taxation of corporate income in Britain by providing a tax credit to shareholders that reduced any tax payable on their dividends by an amount equal to the tax already paid by the company.
Under ACT, companies paid tax on distributed profits at 30 per cent and that tax payment was credited against their shareholders’ tax liability on the dividends.
So far, so familiar.
Unlike Australia, Britain abolished its dividend imputation system in 1999 following a series of changes the government made that resulted in the system losing its value. Still sound familiar?
In the two decades since, institutional ownership of companies listed on the UK sharemarket has plummeted – a completely unforeseen consequence of a change that has now left policymakers contemplating laws to force pensions and insurance companies to buy British shares.
The numbers are stunning.
In 2000, insurance companies and pension funds owned 38.7 per cent of the British sharemarket.
By 2010 ownership had fallen to 14.4 per cent and by 2020, they owned just 4.3 per cent.
Where did the money go? Almost all of it has been moved overseas into foreign companies and alternative assets.
The reason is clear: dividends paid from British stocks to British shareholders are now taxed twice.
And while the Albanese plan so far is not as drastic as scrapping franking entirely, the complicated interplay of capital markets means the consequences of any weakening of dividend imputation will be severe.
On the surface, the latest proposed change seems simple: the government wants to stop companies paying fully franked distributions that are funded by a capital raising and from conducting fully franked off-market buybacks.
But the proposal will have a significant impact on Australian companies’ ability to pay fully franked distributions and will discourage the normal process of investment, economic growth and capital formation in Australia.
The proposed legislation promotes debt over equity, discourages large, mature companies from paying tax in Australia and will lead to a significant increase in the budget deficit.
If superannuation funds ultimately move money out of Australia, it’s not just bad news for local business, it’s bad news for every single one of us: from our youth looking for a job to anyone saving for retirement.
Because of the changes to dividend imputation in Britain, pension schemes now hold 72 per cent of their investments in fixed income, real estate and other assets – assets that typically offer lower returns than equities and employ fewer people.
Lower returns mean less money saved for retirement and a lower standard of living for retirees.
Contrast that experience to Australia.
Our franking system has encouraged Australian companies to invest in Australia, employ Australians, pay tax in Australia and emboldened Australian shareholders to do the same, in turn creating more local jobs and more ownership of Australian companies by Australian citizens.
Our franking system encourages all Australians, from mum and dad investors to large industry superannuation funds, to support and invest in Australian companies.
This directly reduces the cost of capital for our businesses, improving shareholder returns and allowing all of us to look forward to a safe and prosperous retirement.
Things are now so bad in Britain that London’s most famous companies are drawing up plans to move their listings to New York. A new law has even been proposed to force pension funds to invest 5 per cent of their capital into companies based in Britain to help bolster the local economy.
Labor never lets us forget that Paul Keating invented superannuation.
The question is why the Albanese government is so intent on destroying it.
Geoff Wilson is chairman and chief investment officer at Wilson Asset Management.