Franking credit, capital raising reforms a disaster for the banking sector, says Geoff Wilson

Westpac will ask the federal government to spell out what its proposed changes to capital raisings and franking credits mean for the banking industry.

Westpac chief executive Peter King fielded a question about franking credits at the bank’s AGM on Wednesday. Picture: Nicki Connolly

Westpac chief Peter King says the bank will seek clarity from the federal government over proposed controversial changes to capital raisings and franking credits.

Mr King said that in a stressed environment banks would find it difficult to raise capital and distribute credits.

Mr King was responding to a question at the bank’s annual general meeting from Wilson Asset Management chairman Geoff Wilson, who is campaigning against the changes.

Mr King noted that during the depths of Covid-19 the prudential regulator told banks to raise capital if they intended to pay a dividend, but the changes being proposed would likely impede such a process for distributing ­excess franking credits.

“What happens in a stressed event? APRA did ask (in 2020) that if we paid a dividend we raised the capital; that may not be possible under the rules that the government have proposed,” he said. “That is something we’ll have to work through and clarify with the government.”

In the federal budget, the ­government said it would amend legislation so that off-market share buybacks received the same tax treatment as on-market buybacks.

That means the share buyback amount would be considered capital proceeds rather than a portion being considered a franked dividend.

Wilson Asset Management chairman Geoff Wilson. Picture: John Feder

The government is also pushing ahead with another proposed reform preventing companies from attaching franking credits to dividend distributions funded by capital raisings.

Mr Wilson said the changes were another attack on franking credits, which were essentially a tax credit paid with dividends as the company had already paid tax on its profits.

“It’s clear the government just doesn’t understand the unintended consequences of the legislation that they’re proposing,” he said.

“It’s written so broadly it catches everyone … The cost of capital for the banks is going to go through the roof. The cost of Australia’s capital has declined significantly over the last 30 years because of franking credits.”

Mr Wilson said the proposals would “be a disaster” for the banking sector when it confronted the next crisis.

In October, the Australian Shareholders’ Association said the proposed changes to the franking credits system could “panic” retail investors, particularly those relying on dividends to fund retirement.

Law firm King & Wood Mallesons has said the changes would not only affect a “significant number” of capital raisings, but would be “problematic and concerning for taxpayers and shareholders” if applied retrospectively.

The government has argued the legislation is necessary to stamp out tax avoidance.