Anthony Albanese has been urged by a Senate inquiry to reconsider a key element of the federal government’s proposed franking credits system overhaul, amid concerns from fund managers, investors and the Coalition that the crackdown could smash investment.

The Senate economics legislation committee inquiry into the government’s Treasury laws amendment bill – chaired by Victorian Labor senator Jess Walsh – said the proposal to target franked distributions funded by capital raisings should be “clarified”.

“The committee believes that some of the feedback provided in submissions and to the hearings are worthy of further consideration by the government and the parliament to further improve the bill,” the inquiry report released on Friday said.

“The committee recommends the Australian government consider opportunities to clarify schedule 5 of the bill (franked distributions funded by capital raisings) to ensure it appropriately targets the identified behaviour and addresses feedback provided to the committee.”

Wilson Asset Management chair Geoff Wilson – who led the campaign against Bill Shorten’s 2019 policy to ban excess franking credits and manages $5bn in funds for 130,000 retail investors – told The Weekend Australian that the report is “a partial victory for sanity”.

“The Senate appears to understand franking. Now the government needs to step up and abandon their push to dismantle the franking system, and remove schedule 5 from the bill,” Mr Wilson said.

Treasury says the proposed franking credits changes would raise $550m from aligning the “tax treatment of off-market share buybacks undertaken by listed public companies with the treatment of on-market share buybacks”, and $10m a year by stopping companies paying dividends and restricting access to credits for individual shareholders.

Labor’s majority report recommended that schedules 1-to-4 of the government’s bill be “passed unamended”.

“The committee recognises that there is a level of misunderstanding within the community about the rationale and application of the bill. The committee is reassured that the proposed amendments will improve the integrity of the imputation system by ensuring companies are unable to enter into contrived arrangements to artificially distribute excess franking credits,” it says.

Assistant Treasurer Stephen Jones – who is leading the government’s franking credits crackdown – has said the changes would “close an unintended loophole that allows large corporations to effectively gain a taxpayer subsidy for off-market share buybacks”.

The Coalition senators’ dissenting report called for the parliament to “not pass” any of the franking changes and warned the $10m gain from targeting franked distributions funded from capital raisings posed a much bigger “revenue risk”.

In response to the inquiry report, Mr Jones, also the Financial Services Minister, said “Labor calls on the Senate to pass these important reforms, to prevent abuse of franking credits, and strengthen the powers of the Tax Practitioners Board”.

Mr Jones said the government would “consider the committee’s recommendation to clarify the capital-raising measure to ensure it appropriately targets the right behaviour”.

“We welcome both industry and the committee’s strong support for Labor’s off-market share buyback measure and support for the government’s reforms to the Tax Practitioners Board- these are long overdue reforms that the opposition sat on for years,” Mr Jones said.

“They will strengthen the TPB, and help it better respond to rogue tax agents like we’ve seen with PwC.”

NSW Liberal senator Andrew Bragg, who led the push for the inquiry, said the franking credits proposal is “bad for small and medium business, bad for entrepreneurs and bad for investors”.

“The major parties agree that Labor’s franking reforms should be put to death. Even the government’s own report admits the changes are bad,” Senator Bragg said.

“The evidence presented to the inquiry was overwhelming. It is clear that the changes will destroy the ability of a company to pay a franked dividend when a capital raising has been undertaken.

“In other words, any company raising capital in Australia may find it impossible to pay a franked dividend under the proposed test in the legislation. There is no case to abolish dividend imputation because it promotes investment and the payment of corporate tax in Australia.”

Senator Bragg – who warned Labor’s franking changes would “damage investment levels” – said Treasury officials gave “clear evidence the bill is trying to solve a problem, which does not exist”.

“Companies will be forced to take on more debt, investors will have fewer franked dividends and corporate income tax collections will be lower,” he said.

“The only reason Labor is pursuing the policy is to raise revenue to pay for its new spending. However the costing underpinning this policy is based on ancient 2016 data and is completely unreliable.”

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