‘Total ignorance’: Wilson warns franking changes will cost the budget

Wilson Asset Management chairman Geoff Wilson says the government’s bid to raise $10 million by modifying legislation around franking credits will cripple the growth of small companies and push larger companies offshore, therefore denting the budget.

Wilson is one of several stakeholders who have made submissions to the Senate standing committee on economics after the Labor government said last year it was looking to implement an integrity measure first proposed by Scott Morrison in 2016.

Wilson Asset Management chair Geoff Wilson says the proposed amendments to franking credit legislation will leave a hole in the budget.Credit: Dominic Lorrimer

The government’s amendment would prevent franking credits being paid to shareholders if the dividends were funded partially or entirely by an equity capital raising.

While it may seem like a minor change, Wilson said the government was showing “total ignorance” of the consequences.

“I don’t think the politicians understand how franking encourages Australian companies to pay tax in Australia, employ Australians and raise capital rather than borrow money,” he said. “It’s one of the reasons we’ve had three decades of no recession and how we weather economic downturns. They’re playing around with the system, which is very short-sighted.”

Wilson warned the proposed change means larger companies will look to minimise their tax in Australia by investing overseas, while smaller companies will find it harder to raise capital. As a result, he said, the amendment will ultimately come back to bite the government’s bottom line.

“Treasury is saying the first-order impact is that it will raise $10 million,” he says. “Our belief is the second- and third-order impacts – which include crippling the growth of small Australian companies and more mature companies minimising their tax payment in Australia – will cost the budget much more.”

Wilson, who previously led the crusade against Labor’s policy to end cash refunds for excess franking credits, said he was concerned the most recent proposal was the “thin end of a wedge” after the party said it would not touch franking.

After embarking on a roadshow around Australia, emailing shareholders and communicating with the major parties to raise awareness on the issue, he has found an unlikely friend in the Greens.

“We’ve sent numerous letters to [Treasurer Jim] Chalmers and [Prime Minister Anthony] Albanese, and they haven’t responded,” he said. “But our conversations with the Greens have been incredibly constructive, so it’s up to the Greens and the independents.”

Others, including Shaw and Partners head of equities Anthony Wilson, have also criticised the measure, saying it would lead to companies taking on debt rather than raising equity to finance their growth.

“It will result in a higher cost of capital and higher corporate leverage in Australian companies,” Anthony Wilson said.

“In times of crisis, the higher leverage which the proposed [legislation] encourages will lead to higher volatility on the listed market. In the worst circumstances, it will result in large capital losses for both retail and institutional investors in the case where overleveraged companies are not able to raise money via a capital raising to repair their balance sheets.”

Geoff Wilson says there is a separate “hand grenade” in another section of the legislation that eradicates companies’ ability to distribute franking credits to shareholders via off-market share buybacks – estimated to save Treasury $550 million.

“There’s a paragraph that effectively stops companies doing off-market buybacks even if those buybacks aren’t associated with any franked dividends, and that’s just badly drafted,” he said. “That’s totally unacceptable.”

But Wilson maintains it’s the $10 million saving measure that is most problematic. “It virtually raises no money, and it will end up leading to a $1 billion or $2 billion hole in the budget,” he warned.

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