By John Kehoe


Shareholders in listed companies including Westpac and Harvey Norman could receive shock tax bills as a result of the Albanese government’s proposed retrospective crackdown on franked dividends funded by capital raisings.

Gerry Harvey slammed the Labor government’s plan to backdate the measure to December 2016 when it was originally announced by then Liberal federal treasurer Scott Morrison, but never legislated.

The Harvey Norman co-founder said, “I don’t know how you can retrospectively go back six years.

“That’s just bloody stupid.

“You might have an argument about franked dividends, but retrospectivity is dangerous territory because you will get attacked by a lot of people when you take that route.”

The government has proposed an “integrity measure” to ensure that only distributions equivalent to realised profits can receive a franking credit, alarming investors in companies that have paid special dividends or issued new shares in the past six years.

Harvey Norman undertook a $174 million capital raising in October 2019 and a $164 million equity raising in 2018.

While the issue of new shares was ostensibly done to reduce debt, it also allowed the retailer to pay out more in dividends than it earned in profits and pass on to investors excess franking credits on its balance sheet.

Investors pointed to Westpac’s $2.5 billion capital raising on November 4, 2019, to strengthen its balance sheet and support customer growth.

On the same day, Westpac announced a fully franked dividend of $2.8 billion at 80¢ a share. The capital raising proceeds were received before the final dividend was paid.

Westpac paid no interim dividend six months later due to COVID-19-related dividend restrictions imposed by the banking regulator.

Westpac was contacted for comment on Tuesday.

Depending on how the Australian Taxation Office applies the proposed new law, shareholders in dozens of other companies could be affected.

The ATO publicly warned in 2015 that it was concerned about capital raisings being used to fund the streaming of “trapped” company dividends to shareholders.

A government source said the start date of the proposed measure would be considered by Treasury’s consultation with stakeholders.

A ‘minor’ change
The surprise move, revealed in draft legislation released by Treasury this month, has brought back memories of Labor’s far bigger proposed crackdown on $11.4 billion of refundable franking credits that contributed to its 2019 election loss.

Treasurer Jim Chalmers said on Monday that it was “nothing like” the previous abandoned policy and was a “minor” change originally announced in the 2016-17 mid-year budget update by Mr Morrison.

Treasury forecasts the “franked distributions and capital raising” measure will raise a relatively modest $10 million a year, but investors fear the cost to them will be larger.

The change could disallow some franking credits paid to retail shareholders, superannuation funds and trusts that receive dividends from public and private companies.

The dividend imputation system works when an Australian corporate tax entity distributes profits to shareholders and can pass on a credit for company tax it has paid via a franking distribution.

Most resident shareholders that are individuals or superannuation funds can then claim a refundable tax offset equal to the amount of the franking credit.

Finance academics Christine Brown and Kevin Davis told Treasury that the proposed legislation addressed the wrong problem on franking credits.

“There is nothing inherently wrong with raising cash needed to do so by issuing new equity,” they noted in a submission to Treasury.

“Under the imputation tax system, company tax paid is meant to be a prepayment of investor level tax, and unused franking credits in a company’s franking account balance are a withholding of tax credits due to shareholders.

“It also unnecessarily complicates tax legislation via the discretion given to the ATO to determine when franking of dividends involved is to be disallowed.”

The government could raise more revenue from targeting the “streaming” of franked dividends via off-market share buybacks to select shareholders, Professor Brown and Professor Davis said.

“It is not the (near) simultaneous raising of equity to finance a distribution to shareholders which is the problem,” the academics noted.

“It is the streaming of dividends which should be the issue of concern.

“A much simpler solution to the problem of preventing streaming of franking credits (with its inherent cost to government tax revenue) would be to abolish the ability of companies to undertake what we have called TOMBS (Tax-driven Off Market Buybacks).”

Off-market share buybacks give shareholders the option to sell their shares back to the company.

Australia is virtually the only country in the world where shareholders offer to sell their shares at a discount. Low-tax and zero-tax shareholders such as superannuation funds, retirees and charities then receive franked dividends in return, as part of a mix of capital returns and franked dividends.

“Those franked dividends are being streamed to those on very low tax rates and not being given to foreign shareholders where they are wasted,” Professor Davis said.

The ATO in 2015 issued a taxpayer alert raising concerns about franked distributions funded by raising capital releasing credits to shareholders.

“A company with a significant franking credit balance raises new capital from existing or new shareholders,” the ATO said.

“This may occur through issuing renounceable rights to shareholders.

“Shareholders may include large institutional superannuation funds.

“At a similar time to the capital raising, the company makes franked distributions to its shareholders, in a similar amount to the amount of capital raised.

“This may occur as a special dividend or through an off-market buy-back of shares, where the dividend forms part of the purchase price of the shares.

“We are concerned that the arrangement is being used by companies for the purpose of, or for purposes which include, releasing franking credits or streaming dividends to shareholders.

“This may attract the operation of the anti-avoidance rule.”

Treasury has set a three-week consultation period on the exposure draft legislation, between September 14 and October 5, for stakeholders to provide feedback.

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