Wilson Asset Management

By Andrew Bragg

Investors including individuals, superannuation funds and managed investment schemes have been incentivised by franking credits to invest in Australian companies.

Fiddling with this system could have drastic effects on Australia’s economy.

Labor’s changes to capital raising rules and franking would force companies into using debt financing. This would increase levels of market risk and stifle corporate innovation and growth.

When we have high inflation and increasing interest rates, it’s economically illogical to increase corporate debt reliance.

Yet Labor is proposing changes to the franking system that would do just that.

The proposed reforms would restrict Australian companies from issuing franking credits unless the company has an established practice of doing so.

Treasury’s costing of this policy purport to save the budget $10m per annum.

When these changes were before the Senate Economics Committee, I had the chance to grill the Treasury on the costing.

The hearings showed Labor is using Treasury as a shield to implement a policy they either don’t understand or are seeking retribution for the 2019 rejection of franking changes.

Their responses raise two issues with the justification being used to kill franking credits.

First, Treasury admits that there is no basis to change the franking credits system.

Labor claims that these changes are necessary to prevent franked dividends from being paid when there is no change in the financial position of a company.

When I pressed Treasury on the extent of franking credits being misused, they could not provide a single example of this occurring. They told the committee – “there aren’t any cases of this”.

Not only did Treasury inform us this is not a problem, they told us that “the combination of those measures has meant though that this behaviour has been dampened”.

Treasury admitted that currently there is no present issue with capital markets. Yet Labor is using this as a primary justification for these changes. In doing so, Labor and Treasury are trying to resolve a non-existent issue.

The potential economic effects of these changes are far greater than the potential misuse of franking credits.

If implemented, these changes will be retrospective from September 15, 2022. The ATO would have the mandate to deem franked dividends as unfrankable.

At the behest of the ATO, investors would be forced to repay franked dividends from previous financial years.

For retirees that fund their retirement with franking credits, this is a cruel proposition.

The Labor Party is using the Treasury as a Trojan horse to sneak through an attack on franking that was overwhelmingly rejected by Australians at the 2019 election.

Second, the Treasury’s costing is based on figures from 2016.

Prior to these hearings, Treasury blocked the Parliamentary Budget Office from providing me with the method used to calculate the $10m per annum saving.

I requested these costings to determine why the purported saving of $10m remained static between years.

When I asked the Treasury why there was no variation in savings, they admitted that they had not conducted costings since 2016.

Treasury stated that the data “had to reflect the observable data that we had from 2016”.

Labor is relying on eight-year-old data that reflect market dynamics that are totally different compared to today.

Without current data, the true cost of Labor’s changes remain unknown. But it is highly unlikely they would deliver any savings to taxpayers. In contrast, the investment industry’s evidence was that these changes will cost taxpayers between $1bn to $2bn per annum.

Treasury admitted that the supposed mischief doesn’t exist in 2023, and yet their costing is allegedly predicated on data from 2016, not long after the ATO put out a Tax Alert which successfully deterred such behaviour since then.

Restricting the ability of companies to undertake capital raisings will impact their capacity to undertake growth activities.

A reduction in corporate growth will reduce corporate tax revenue. It may incentivise other forms of tax avoidance that the dividend imputation system is designed to mitigate.

The benefit of franking credits is that they have facilitated corporate growth while providing returns to local investors. Labor doesn’t seem to be worried about the loss of corporate tax revenue even as it delivers its second budget with significant new spending.

Unless the corporate income tax base is secure, few promises can truly be funded.

Ultimately, this radical change to franking credits has no purpose. The sole guarantee is lower levels of investment and tax collection which the nation cannot afford. The only real solution is to drop the friendless, risky measure.

Andrew Bragg is a Liberal Senator for NSW and deputy chair of the Senate Economics Committee.

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