Eliminating the payment of franked dividends to Australian investors through off-market share buybacks is an underhand attempt to destroy the system Paul Keating created.

Back in 2013, Paul Keating, the architect of Australia’s dividend imputation system, warned that around every seven years, Treasury would try to dismantle the franking system. By that reckoning, Treasury – and the obliging Labor government – are three-and-a-half years ahead of schedule.

In May 2019, Bill Shorten’s disastrous and inequitable plan to scrap franking credit refunds, dubbed the “Retirement Tax”, helped in costing him the federal election. Yet, Labor is at it again – this time with a two-pronged policy attack on the franking system from a different angle.

Assistant Treasurer Stephen Jones is trying to spin the proposed policy changes as “closing loopholes”.  Oscar Colman

October’s federal budget included a change to the franking system, designed to eliminate the payment of franked dividends to Australian investors through off-market share buybacks. A month earlier, Treasury had proposed a separate measure to stop companies from paying shareholders fully franked dividends when, in Treasury’s view, the fully franked dividend was directly or indirectly funded by any capital raisings, either before or after the payment of a fully franked dividend.

Treasury’s initial costings of the changes grossly underestimates the impact to Australian shareholders and companies. In my opinion, the proposed legislation changes are a complete regulatory overreach.

These two policies are an underhanded attempt to tear apart the franking system introduced by Keating in 1987. While Shorten’s 2019 plan would have directly stopped mum and dad investors from receiving refunds of franking credits distributed through fully franked dividends, the latest proposals target the source, effectively preventing companies from paying out fully franked dividends to investors entirely.


In the lead-up to the federal election, Anthony Albanese repeatedly ruled out any reform of the franking credits system. “I can confirm that Labor has heard that message clearly,” he declared in January last year. “And that we will not be taking any changes to franking credits to the next election.”

Just six months into government, Assistant Treasurer Stephen Jones is trying to spin the proposed policy changes as “closing loopholes” rather than “broken promises”. Unfortunately, this is being misleading. These changes are undoubtedly a broken promise.

Worse than Labor’s lack of transparency, it shows a lack of logic and a failure to grasp the unintended consequences of its policies.

The proposed changes to the franking system are being disguised by the government as tax “integrity measures”. In reality, they will not impact high income earners or institutional investors.

Those who will be most affected by these changes are the self-funded retirees and retail investors. They are honest, hardworking Australians, who have saved and invested their earnings in a portfolio of predominantly Australian companies, and they rely heavily on the fully franked dividends paid to them. Any change to the franking system would be unfair to them.

The dividend imputation system was a key pillar of the Hawke-Keating economic reforms that have helped underpin three decades of recession-free economic growth in this country. It has also protected Australian companies through times of economic instability, reducing their need to take on unnecessary debt by providing a low cost of capital and the ability for them to raise money from their shareholders.

Not only does the franking system remove double taxation, it promotes economic stability. It encourages companies to invest and pay corporate tax in Australia, and it emboldens Australians to invest locally, rather than overseas. This, in turn, creates more jobs – as well as the additional income tax revenue that Treasury and government are clearly seeking.

By contrast, the proposed changes to the franking system would significantly disrupt capital markets, investment and economic growth in Australia. They would also risk the stability of the Australian banking system by inhibiting effective capital raising during challenging economic periods.

Simply put, companies would face a stark choice: to reinvest in the growth of their businesses and the Australian economy, losing their tax paid and franking credits forever; or to reward their shareholders by taking on unnecessary risk and gearing up in order to distribute fully franked dividends.

None of these options look good for Australia’s growth prospects.

The proposed changes have broad-reaching, unintended consequences for Australia. They discourage company investment in Australia, discourage the payment of tax by some of our largest corporations and discourage Australians from investing in their own country.

In 2013, Keating pointed out that his dividend imputation system had revolutionised capital formation in Australia. He urged us to remain vigilant in protecting that system.

We ignore his warnings at our peril.