Wilson Asset Management

Advocating for retail investors and the community | Retirement tax 2.0?

Our dividend imputation system is in jeopardy once again with a two-pronged policy attack by the current government that will weaken the franking system by limiting the ability of companies to distribute franked dividends to shareholders.

Update on the Australian Franking System

Since Labor first proposed changes to Paul Keating’s franking system in 2018, I have been proud of the work we have done together to ensure its preservation and I want to thank and congratulate everyone who has been vocal and supported our efforts throughout the journey. With your help, we have achieved some positive outcomes with raising awareness on the unintended consequences being our biggest achievement. The corporate world, many in the Senate and Government, as well as industry bodies and academics now understand the importance of protecting Australia’s franking system. In November, the Federal Government debated Treasury Laws Amendment (2023 Measures No.1) Bill 2023 and its proposed amendments. While many amendments have been accepted, Schedule 4: Off-market share buy backs and Schedule 5: Franked distributions funded by capital raisings were passed as law.

While this is a disappointing outcome, by taking a public stance against these illogical changes and highlighting the ineffective drafting from Treasury and the unintended consequences of the bill, we have secured some important amendments to Schedule 5:

  1. Dividend reinvestment plans (DRPs), including underwritten DRPs, that are undertaken for normal commercial purposes will no longer be impacted by the legislation, nor will family or commercial dealings of private companies used to facilitate the departure of one or more shareholders from a company. This is an important win, particularly for Australian banks who use DRPs and underwritten DRPs as an effective capital management tool and to reward shareholders.
  2. Acknowledgement that it was unfair to remove franking credits in their entirety, where only one dollar of a franked dividend payment could be linked to a capital raise. The bill has been updated so that franking will only being disallowed when a ‚Äúsubstantial part‚ÄĚ of a dividend payment is linked to a capital raise. In those circumstances, only that portion of the franked dividend will be unfrankable, not the entire franked dividend. While it remains to be seen how Treasury and the Australian Taxation Office (ATO) will define ‚Äúsubstantial part‚ÄĚ, we are pleased to see this element of the law being improved.
  3. The law will not be retrospectively applied, but instead applied on commencement of Schedule 5 passing as law.

We must not give up, we must continue to raise awareness to stop them proposing further changes. I urge you to continue to write to your local MP and express your concerns.

The UK have learnt from their mistakes and are currently looking at reintroducing a system based similar to our own. As you may have heard in a previous note from us, the United Kingdom (UK) had a similar system called the Advance Corporation Tax (ACT) which was introduced in 1973 and was slowly dismantled until it was abandoned in 1999. Since then, the institutional ownership of companies listed on the UK stock market has plummeted and the numbers are astonishing. In 2000, insurance companies and pension funds owned 38.7% of the UK stock market and by 2020 they owned just 4.3% with the money being moved overseas into foreign companies and into alternative assets. If you would like to read more about what has happened in the UK, read an OpEd I wrote for The Australian.

What does this mean for you?
Your franking credits will not stop overnight. Over time companies who are undertaking capital raisings as a capital management tool will no longer be able to pay franked dividends and franking will be eliminated when linked to an off-market share buy-back.

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Policy submission to the Treasurer

Response to the consultation on the proposed legislation relating to Franked Distributions and Capital Raising.

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Submission on Treasury Laws Amendment (2023 Measures No.1) Bill 2023

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Submission on Franked Distributions and Capital Raising Consultation

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Submission on Treasury Laws Amendment (Off-Market Share Buy-Backs) Bill 2022

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