Dutton and dividends – dud political efforts all round

Standing in a South African airport queue on Friday and a news headline rolls over a television screen - something about someone slamming Peter Dutton’s South African political excursion. I’m involuntarily shaking my head as I look away.

At the end of a few weeks watching Australian politics from afar with an increasing sense of incredulity, Dutton’s desire to again make skin colour an explicit visa criterion was a step into the surreal. No, worse – the Trumpian.

Home Affairs Minister Peter Dutton wants to help white South African farmers come to Australia.Credit: Alex Ellinghausen

Somewhat overlooked among the outrage over the most obvious aspect was that one of Australia’s most senior ministers had casually and ignorantly implied an important, large, democratic, developing nation was uncivilised. Not a fit place for the white man.

That would go down well at The Commonwealth Heads of Government Meeting for wannabe-PM Dutton. And I wonder what the non-white ASEAN attendees might have thought of Malcolm Turnbull’s subsequent silence.

Without the apparent benefit of Mr Dutton’s Daily Telegraph and alt-right briefings,  I can’t be an expert on South Africa but I do understand the country has monumental imbalances and strains as well as great opportunities, that it carries a burden of recent history beyond Australia’s ken, that it has vast natural wealth and human capital. It also suffers high crime and violence in some areas.

But to put that crime in a little perspective: the murder rate in St Louis, Missouri, is worse than in any South African city. All South African cities bar one have murder rates below Baltimore, New Orleans and Detroit. There are millions of proud white South Africans who don’t feel the need to be refugees. Maybe we need to fast-track visas for New Orleanians.

Until Dutton announced his desire for white kindred-spirit visas, it was the mess Labor made of announcing its dividend imputation reform that seemed the dumbest political effort of last week. To claim the Batman by-election win as approval for the policy is a bit of a stretch, and still doesn’t excuse the incoherent launch.

The primary job of politicians is politics, a massive part of which is communicating policy. If they’re not much good at that - their day job - it’s not easy to understand how they could handle any greater responsibilities.

Whiff of class warfare

So when Bill Shorten makes a major announcement out of a somewhat confused change in the treatment of dividend imputation, fails to adequately communicate what it’s about so it’s tainted with a whiff of class warfare, and then sort-of backtracks a bit while his Batman candidate panics and says “maybe” - oh dear.

Not that the government kept itself nice. Far from it. Treasurer Morrison has been adequately flailed for his inevitable scaremongering. All that was missing was a $100 leg of lamb.

Senator Mathias Cormann, someone we’re supposed to trust with finance, tweeted nonsense that was at best deliberately misleading and, at worst, indicated he had no idea what dividend imputation was about.

No, Senator, franking credits are not and never were “excess tax”.

To put it very simply: dividend imputation – franking – was supposed to be about avoiding double taxation. Shareholders weren’t to pay tax on the part of their dividends that their company had already paid tax on. Tax was to be paid on the company’s profits only once.

Bill Shorten has struggled to adequately communicate his dividend policy plans.Credit: AAP

Exploiting other people's money

But then Howard and Costello, the team that turned superannuation into a most extraordinary tax haven, went a very big step further by giving the tax credit as cash to people who didn’t pay tax. The effect was not to avoid double taxation, but to cancel out the original tax altogether.

Yes, it was a wrong and irresponsible gift for a key subset of the Liberal heartland.

But once you give people other people’s money, they don’t like it being taken away again. Entire industries grow up around exploiting OPM (Other People's Money) and ordinary people – some quite comfortable, some quite poor – reasonably structure their savings to suit.

Which is why you hope politicians would tread carefully as part of broader reform, that they would start by actually communicating, by explaining why Howard and Costello had made an expensive mistake, pointing to the dire cost of letting it run unchecked, working up to regretfully capping how much OPM each individual could have.

That would have a better chance of building confidence and consensus than subsequently backing down with the offer of a cap.

And you wouldn’t do it in isolation, seeming to pick on individuals. There are other aspects of the way franking credits are used that could do with policy review.

Such as banks using franking credits to effectively subsidise the interest rate paid on their hybrid fund raising and the ever-popular share buyback rort whereby companies selectively deal with their shareholders, using franked “dividends” to fund some of the cost.

Half-arsed efforts

ATO-approved accounting engineering allows banks to claim the interest payments on hybrids are “dividends” and thus are marketed at a pre-tax interest rate that includes the value of franking credits. No, it wouldn’t pass the pub test.

Buybacks are what companies claim to do with “excess” capital. They are liked by senior management because they effortlessly boost earnings per share (sometimes a metric for executive bonuses) and the share price (nearly always a metric for executive bonuses).

When much policy is supposed to be about “boosting investment’, buybacks are anti-investing, what management does when it’s not capable of investing. And history suggests management tends to buy high, rather than low, as short-term CEOs have short-term goals.

Australian buybacks that are tax-enhanced with a fully-franked dividend element also mean a degree of discrimination. Instead of treating all shareholders equally by simply paying a larger or special dividend, those executive-bonus-friendly buybacks are aimed at shareholders paying low or no tax.

Labor is having a crack at bits and pieces of the tax system but without a holistic context. Half-arsed efforts create the blowback that immediately has the party backtracking and wedges the other mob into gleefully defending something not worth much defending.

And get back to me when Labor again has the backbone to tackle novated leases and GST reform.