Franking credit crackdown threatens banks’ capital raisings

The government’s franking credits intervention could add uncertainty to capital raisings banks undertake to comply with prudential requirements, the Australian Banking Association says.

Critics have accused the Albanese government of breaking an election promise.

The Albanese government’s crackdown on franking credits could add uncertainty to capital raisings that banks undertake to comply with prudential requirements, the Australian Banking Association has warned.

In its opening statement to the senate inquiry into franking credits, the ABA said the proposed rules could inhibit dividend reinvestment plans, which help banks maintain regulatory capital.

While acknowledging the intent of the proposed laws is to stop companies from raising capital solely to fund the distribution of franking credits, ABA chief of policy Chris Taylor said its scope was “wider than ­intended”.

“The ABA believes that legislative certainty is of paramount importance for banks looking to raise and manage capital to meet prudential requirements,” he told the inquiry on Tuesday.

Banks fear the proposed legislation raises fears some capital raisings or dividend reinvestment plans could be deemed “unfrankable” despite them not being intended to fund any dividend or distribution.

Franking credits are granted to shareholders to avoid double taxation on earnings by accounting for tax companies have already paid.

The government’s proposed measures are designed to prevent franking credits from being paid through capital raisings, and to crack down on companies using favourable tax treatments for off-market share buybacks with attached franking credits. It hopes to save the budget $650m a year.

FSC director of policy and advocacy Spiro Premetis.

The proposed legislation is being considered in a senate economics committee inquiry that will report by May 26.

Investment funds also told the inquiry the changes might prevent companies paying fully franked dividends associated with a capital raising.

Mr Taylor said the risk “exists despite such capital not being raised with the intention to fund any dividend”.

“Where a bank capital raising occurs near the time of a franked distribution payment, it should not be assumed that the two events are connected. Ultimately, a bank’s distribution policy and capital requirements are separate commercial decisions that serve different commercial and prudential purposes.”

The Financial Services Council, which represents retail and wholesale funds management companies, super funds, life insurers and advisers, told the inquiry its members wanted certainty on the tax outcome for investors that received distributions with franking credits ­attached.

“Currently, investors that receive a franked dividend are able to rely on the franking credits presented in their distribution statement for their own tax purposes. This means if a company makes an error in reporting franking, the investor will generally be unaffected,” FSC director of policy and advocacy Spiro Premetis told the committee.

“Under this measure, a company could make a distribution with franking credits attached that subsequently become unfranked.”

Critics have accused the Albanese government of breaking an election promise with these proposals.