The Federal Government’s crusade against franked dividends and Australia’s corporate tax imputation system continues.
Federal Parliament recently introduced a bill which proposes measures that seek to:
- prevent certain distributions that are funded wholly or partly by a capital raising from being frankable; and
- align the tax treatment of off-market share buy-backs by listed public companies with on-market share buy-backs.
It will be recalled that Australia’s dividend imputation (franking credit) system works when an Australian company distributes profits to shareholders and can pass on a credit for company tax it has paid via a franked dividend.
The franking credit system
was designed to avoid multiple layers of tax being levied on the same economic income. It is a recognition by the tax law that shareholders are the ultimate owners of the company’s underlying assets and income. It follows that these shareholders should be ultimately taxed on this income (when it is distributed to them) at their respective tax rates. Simply, if a shareholder’s tax rate is lower than the company’s tax rate (eg retail shareholders or superannuation funds), they could be entitled to a refund of excess franking credits.
The Federal Labor Government has taken aim at the franking credit regime.
Initially Labor proposed a crackdown on $11.4 billion of refundable franking credits that contributed to its 2019 election loss. In recognition of this revolt by voters, Labor (before winning the latest election) promised to not make changes to refundable franking. Now in power, the current Labor Government has altered its angle of attack and is now aiming at companies with large balances in their franking accounts (and not voter shareholders).
The latest iteration in the proposed legislation aims at perceived abuses involving companies who pay large or abnormal/ special dividends (with attaching franking credits), where these dividends are funded by a related capital raising by the company. In essence, (on a net-basis) the company has parted with little cash and the overall transaction is perceived as abusive because it is simply seen as a means of distributing (refundable) franking credits to shareholders.
The proposed legislation will also effectively deal a death blow to
discounted off-market share buy-backs by public companies. (Before the proposed changes, such buy-backs could be structured as franked dividends and channelled to shareholders with lower tax rates.) Whilst the proposals address transactions which may involve selective channelling of franking credits, it is our opinion that the current law contains rules which already address potential abuses and that these proposals are not actually necessary. If anything, such laws (and the general antagonistic approach of the Labor Government) may serve to undermine confidence in Australia’s capital markets and the attraction of doing business or raising capital in this country. For similar reasons, we are also very concerned about the government’s recent pivot on the taxation on superannuation – See our Insight on the proposed superannuation changes.
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