Geoff Wilson: "Illogical" changes could see investors miss out on $85 billion in fully franked dividends

Ally Selby

Livewire Markets

The proposed changes to the country's franking credit system are "significantly un-Australian", and could see millions of investors denied billions of dollars worth of fully franked dividends annually.

That's according to Wilson Asset Management founder Geoff Wilson AO, who argues the current government does not appreciate the real ramifications of the two proposed policies.

For some background, in September, Treasury released draft legislation that could prevent companies from distributing franking credits to shareholders if it deemed these were (directly or indirectly) funded by capital raising activities. 

Then, in October's Federal Budget, another change was announced, this time, eliminating the payment of franked dividends to Australian investors through off-market buy-backs. 

Mind you, this is after Treasurer Jim Chalmers promised the Government would not be making any changes to the franking credit system on 4BC Drive back in January. And later, Prime Minister Anthony Albanese vowed much the same on ABC Perth in March. 

"These two pieces of legislation will significantly impact companies' abilities to pay fully frank dividends and significantly impact the banking system to operate efficiently," Wilson said. 
"It will significantly influence where companies invest, in terms of investing in Australia versus overseas, as well as to what extent they do invest." 

And it's not just companies that will be worse off, Wilson said, 17 million Australians (or anyone with super) will miss out on $85 billion in fully franked dividends... annually (that's the amount companies pay, on average, each year).

"$85 billion in fully franked dividends didn't get paid last year, which could have been paid," he explained. "If this legislation comes in, it never will be."
Geoff Wilson AO of Wilson Asset Management. (Source: Supplied)

The power of Keating's franking credit system

Franking credits, or imputation credits, help prevent double taxation and are distributed to shareholders alongside dividends when an Australian company has already paid corporate tax. 

For example, if a company made $100 million pre-tax profit, it will pay $30 million in tax (30%). The company can then pay out the remaining $70 million to shareholders as a fully franked dividend.

Investors then include the franking credit received as part of their gross taxable income, together with the dividend income, and utilise the tax paid on their behalf to reduce any tax liability they have. If the investors’ resulting tax position is a liability, they pay additional tax on their net taxable income, or if the resulting tax position is an asset, they will receive a refund of the excess tax that has been paid on their behalf.

This is why there was so much uproar back in 2018 and 2019 when Bill Shorten tried to crack down on franking credits. In fact, later, he admitted this policy cost him the election. 

But it's not just companies, superannuation funds and individual investors who enjoy the benefits of Keating's franking credit system. According to Wilson, it also has kept our economy afloat for the past 30 years. 

"In 1987, Paul Keating introduced the system with Bob Hawke. He came out in the early 90s and talked about the recession we had to have. And since that recession, we've had 30 years of uninterrupted growth without a recession," Wilson explained. 

"One of the reasons we've had that is because of the franking system. The dividend imputation system removes double taxation." 

Outside of Australia, it's in a company's interest to take on more debt rather than raising equity, he said, as paying interest on this borrowed cash is tax deductible. 

"However, in Australia, because of our franking system, that reduces the cost of capital for Australian companies," Wilson said. 

"So Australian companies tend not to borrow money to the extent that they do in the US or Europe, they tend to have less debt and more equity on their balance sheets. That means when things get tough and when economies are slowing down, the Australian economy does so much better." 

In fact, Wilson believes Australia's capital system is to thank for surviving the Global Financial Crisis, and why we are unlikely to collapse into a recession in the coming year. 

"Relative to the US and Europe, we'll outperform. Why? Because equity is cheaper than debt, and that's because of the franking system," he said. 

So why does Treasury keep pushing to overthrow the system? 

Like the answer to many of the world's questions, it's money. 

Treasurer Jim Chalmers believes the capital raising-related changes to the franking credit system could add $10 million to the Budget each year. Meanwhile, the off-market buy-back changes could raise $550 million over three years.

As former Treasurer and Prime Minister Paul Keating once wrote, Australia's superannuation industry should "remain vigilant in protecting dividend imputation," as around every seven years, Treasury "promotes a debate to remove it." 

"Dividend imputation revolutionised capital formation in Australia. The Treasury was uncomfortable with it because of its cost to revenue," he wrote. 

Unfortunately, the Labor Government's latest cash grab is "all spin", Wilson said. 

"Back in 2018 when they announced that they were going to stop franking, the spin was taking the money from the rich and giving it to the hospitals," he argued. 

"It took people time, but they started to understand exactly what they were doing and how unfair and inequitable the policy was back then. It was illogical." 

This time, the spin is "it's not us, it's the Liberals, they came up with it in 2016," which is why there is a retrospective element to the buy-back policy, he explained. 

"That is all part of the spin ... And then what they'll do is they'll say, 'We'll drop the retrospective thing, but we're going to do it anyway.' And they'll blame it on the Liberals," Wilson said.

"The spin on the buy-backs is, 'Oh, we're closing a loophole.' That's like saying, 'We are removing the two back wheels of the car, but the car is still there, you can keep the car." 

How the changes could impact investors 

Over the past few years, Wilson has arisen as an unlikely champion for retirees and self-directed investors. He pretty much spearheaded the campaign against Labor's proposed changes to the franking credit system back in 2018/2019 and is now on the case again. 

To Wilson, funds management is "not only about performance and managing money, but standing up for what we believe is right and what we believe our shareholders want and need as well." 

"We've always been very prepared to stand up to companies and politicians. Over the last 25 years, we have been as outspoken as we believe is necessary to get a point across," he added. 

Following the announcement of the proposed changes, Wilson wrote to the fund management group's 130,000 shareholders urging them to lobby members of parliament and write submissions to prevent any changes to the system. He received an outpour of responses, four of which he has kindly shared below: 

“My wife is 75, I am 81 years old, and we both have health problems. We started early in life to invest in Australian shares to provide us with an income in our retirement. Franking credits are an essential part of it. We have no Super, no health care card, and no Centrelink benefits of any kind. On our tax return, we both receive a low-income offset so we are hardly super-rich. We are strongly opposed to the proposed new legislation in regards to fully franked dividends.”

My husband and I are not rich. We have worked hard our whole lives and diligently paid our taxes. Now that we are retired, rather than relying on the old-age pension, we bought some shares and are surviving on the franking credits. Without those assets, we may have to apply for the pension. We always thought that the government will take care of disadvantaged people but if the legislation is passed, it is taking advantage of disadvantaged old people like us.”  

“I am a 69-year-old female, disability pensioner with no Superannuation and I live in government housing. I rely on my franking credits to support my pension. My tax return is done in early January and the franking credits usually are enough to pay the accountant’s bill and assist me through the holiday period.”

“I am 63 years old. Due to a recent accident, I am limited to a few possibilities of work, solely casual and not regular. I am dependent on my SMSF income to support myself and my wife. I am by no means rich, I don't receive any government subsidies or concessions. I pay all my taxes. I aim to continue to be self-funded and in doing so I am not burdening the government with pension payments. I do need my franking credits to support my income and without them, it would cause considerable hardship for us. To be retrospectively charged would see us possibly on the street, which in our time of life is totally unjust.”

What can you do? 

While submissions on Treasury's proposed changes to franking credits linked to capital raisings are now closed, investors can still submit responses on the changes to buy-backs until December 9th, 2022. 

You can read through the explanatory documents and learn how to draft a submission here. 

We'd also love to know how you think these changes will impact investors like you. Let us know in the comments section below. 

Education
The divide(nd) of income: how to invest for franking credits

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Ally Selby
Content Editor
Livewire Markets

Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...

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