By Cliona O’Dowd

Labor’s latest attack on franking credits has ignited a fresh feud between investors and the federal government, with fund managers savaging a proposal to prevent companies from paying out franked dividends funded by capital raisings.

In a shock move, Labor has taken fresh aim at dividend imputation credits despite the contentious issue costing it the 2019 election, with the government putting forward draft legislation that retrospectively targets franking credits on special dividends paid out since December 2016.

Treasurer Jim Chalmers on Monday insisted the legislation was a “very minor change” and a loophole closure first proposed by the Coalition six years ago.

“This is a Liberal Party policy announced by treasurer Scott Morrison in the 2016 mid-year update,” Dr Chalmers said.

“This is a very minor change proposed by the Liberals who couldn’t get their act together on legislation, another mess that we’ve been asked to clean up which wasn’t done by our predecessors. It’s a very minor measure.”

But fund managers, including Wilson Asset Management chairman Geoff Wilson, criticised the government for again pouncing on franking credits.

Mr Wilson labelled it a cash grab and warned it was just the first step in the dismantling of the franking system.

“If you stop every growth company that raises capital from paying a fully franked (special) dividend, that’s a big segment of the Australian corporate sector and puts growth companies at a big disadvantage,” he told The Australian.

“It should have been off the table for a generation, for 30 years … this is the start of the dismantling of the Paul Keating-introduced franking system,” he warned, as he pledged to fight the proposal with “the same amount of resources as we did in 2019”.

The move against dividend imputation credits will be a hit to both retail investors and super funds, with Labor targeting distributions that are paid outside or additional to a company’s normal dividend cycle, where these distributions are funded by capital raisings and equity issuances.

First proposed by Scott Morrison as Treasurer in late 2016, the then Coalition government said the measure would address concerns raised by the Australian Taxation Office in 2015.

In a taxpayer alert, the ATO in 2015 said it was reviewing arrangements whereby companies with significant franking credit balances raised new capital from shareholders, including large super funds, and at a similar time, made franked distributions to its shareholders similar to the amount of capital raised.

“This may occur as a special dividend or through an off-market buyback of shares, where the dividend forms part of the purchase price of the shares,” the ATO said at the time.

The tax office concerns came months after ASX heavy hitters Harvey Norman and Tabcorp moved to fund special dividends capital raisings as a means of distributing franking credits to Australian shareholders.

While the Albanese government — and the Coalition before it — estimates the measure will raise $10m a year, Mr Wilson, who spearheaded the campaign against Labor’s so-called ‘retiree tax’ three years ago, said it opened the door to a far higher windfall potentially in the billions of dollars.

“Treasury thinks this will bring in $10m (a year) … but because of the broad wording of the (proposed legislation), and it really comes down to the tax office’s interpretation and its ability to put pressure on large corporate companies, we think the figure could run into the billions by making it retrospective to 2016,” he warned.

Mr Wilson said he was surprised and “incredibly disappointed” to see Labor taking aim at franking again.

“The retail investor will certainly be impacted by the retrospective nature of this. They’ll get a letter from a company saying ‘the dividend you got wasn’t franked so you‘ve actually got to pay tax on that’,” he warned.

BKI Investment Company’s Tom Millner echoed Mr Wilson’s concerns, saying Labor’s move would “raise alarm bells” for shareholders, investors and corporates.

“This is going to affect millions of investors and shareholders and hundreds and thousands of companies. Making it retrospective that far back means it is quite complicated,” Mr Millner warned.

“Companies, boards and management teams, have made decisions on what’s in front of them, they’ve played by the rules. If they want to put new rules in place, it should be on a go-forward basis so companies then know that maybe the off-market buyback they’re considering is not the best option anymore.”

HLB Mann Judd tax partner Peter Bembrick, meanwhile, warned that ASX-listed companies would not be the only ones affected by the proposed legislation.

“The potential impact of this is much wider … it still could be applied not only to the bigger end of town, but to small and medium businesses that might be doing some sort of restructuring, not necessarily for tax reasons or to access the franking credits, but for succession or other business reasons,” Mr Bembrick said.

It also comes down to how the new rules are administered if passed into law, he added.

“The government puts the legislation in place but then the ATO has to administer. If they administer it quite strictly or unfavourably for taxpayers then obviously that increases its impact.”

The government is currently seeking stakeholders’ views on the draft legislation, with submissions open until October 5.

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