By Glenda Korporaal
Proposed changes to the franking credits system could “panic” retail shareholders, particularly those relying on dividends to fund retirement, the Australian Shareholders’ Association says.
“It is a surprise to us and to retail shareholders that this is being considered,” the association’s chief executive, Rachel Waterhouse, told The Australian.
“The fear is that we have gone through a process of discussion over franking credits in 2019. All of a sudden, it has come up again in a different way. Retail investors have a lot of issues at the moment … what is the intention of the legislation?”
Ms Waterhouse said there was increasing of concern about the changes among its members. “This is something that could create a panic, based on what I have heard from our retail shareholders,” she said.
The Albanese government says the legislation, first mooted under the Coalition in 2016, is necessary to stamp out tax avoidance where companies raise capital and subsequently pay out the funds as franked dividends outside the normal cycle.
Ms Waterhouse said the association was particularly opposed to the retrospective nature of the change – it will apply to dividends paid since late 2016.
That is a concern shared by King & Wood Mallesons, which said the change would not only impact a “significant number” of capital raisings but would be “problematic and concerning for taxpayers and shareholders” given it would be applied retrospectively.
In a paper authored by KWM partner Judith Taylor and special counsel Jason Barnes, the firm agrees with Ms Waterhouse’s argument that the need for the change is unclear.
While the government has indicated that it is an anti-tax avoidance measure, the KWM paper authors say: “It is not obvious from the exposure draft what the real mischief is.” It notes that while legislation was announced in 2016, the previous government made no move to implement it.
The KWM paper warns that the proposed measure would hit fast-growing smaller companies who fund their business from capital raisings – paying out dividends at a later date, when the company makes a profit.
The Australian Shareholders’ Association lodged its submission with Treasury on Tuesday, outlining concerns about the proposed legislation, including its retrospective nature and the broadness and “potential subjectivity” of tests that would determine whether a particular dividend payout was captured by the new laws, which will strip the dividends of franking credits.
Ms Waterhouse said the proposal had come at a time when small shareholders and retirees were also being hit with higher petrol prices, increasing interest rates and higher living costs. She said the proposal had “potentially harmful consequences” for shareholders in companies paying out franked dividends in the normal course of their business.
Her comments come as small shareholders are emailing the government with their concerns, encouraged by Wilson Asset Management chairman Geoff Wilson, who waged a successful campaign in 2019 against Labor’s plans to restrict payments of franked dividends.
Mr Wilson told The Australian on Tuesday that the proposal was a “scary proposition” which could potentially raise “billions of dollars” in extra revenue and not the $10m initially estimated when it was first discussed in 2016.
“The government is saying this is a minor measure, but it is not,” he said.
Mr Wilson said his firm had heard from 130,000 shareholders who were concerned about the move following his email last week, far more than the 80,000 who had written to express their concern about the proposed tax changes in the 2019 election.
He called on the government to extend the deadline for submissions on the exposure draft.
The Listed Investment Companies and Trusts Association – representing the listed investment company sector, which has $50bn in investments and 800,000 shareholders – has also expressed its concern at the proposal, warning of “many unintended consequences”.
The process described in the draft legislation, where companies raised capital and paid it out as dividends, was a “normal exercise in cash flow management”, its submission said.
A spokesman for Financial Services Minister Stephen Jones declined to comment.
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