Labor led astray on dividends by Pied Pipers in Treasury: Sandon

Gabriel Radzyminski of Sandon Capital. Picture: Alan Pryke

Submissions to Treasury on proposed tax legislation are usually dry documents.

But that lodged by Sandon Capital criticising the government’s proposed to crack down on franked dividends paid out of company capital raisings has some entertaining language.

The Sandon’s submission, lodged just ahead of Wednesday’s deadline, warns that the proposal is a “knee jerk reaction” which could be a “political suicide mission” for Labor, evoking fears among retail shareholders of the controversial franking credit proposals put forward in the 2019 election by Bill Shorten. It was that proposal which helped lose Labor the election and re-elect Scott Morrison – and led to promises that similar changes were not on the cards under an Albanese administration.

The new change has already been criticised by Wilson Asset Management chair Geoff Wilson, who led the campaign against Labor’s proposals in 2019 and whose new campaign is gaining momentum.

As news of the proposed legislation spreads, the prospect of another attack on franking credits, under the banner of a tax integrity measure, is attracting opposition from shareholder groups and investment firms.

Sandon argues that the proposed legislation is an overreach which could have implications more broadly than the narrow anti-tax avoidance measure it purports to be.

Written by Sandon director Gabriel Radzyminski, the submission implies that the sudden resurrection of an idea which was raised in 2015 and 2016 and then went nowhere under the Morrison government, may be a result of someone winding up the Australian Taxation Office or the government to revive a revenue raising idea at time when the budget is under pressure.

“We believe the exposure draft is the unfortunate product of someone acting like the Pied Piper of Hamelin, luring unsuspecting ATO officers/ Ministers into believing that a random tax avoidance example should be extrapolated into a general clamp down on a commercial practice by labelling the entire practice … as ‘imputation manipulation’,” the submission reads. “The dulcet tones of alleged tax avoidance resonating from the Piper’s magic flute must be particularly attractive at a time when budgetary pressures abound.”

Sandon argues that the government needs to realise that Treasury – which is always on the lookout for new revenue raising measures – will do it no favours if the fears of 2019 are revived with Labor being seen as the party which is a lurking threat to self-funded retirees.

As it notes, it was in January 2021 when Anthony Albanese declared that “we will not be taking any changes to franking credits to the next election.”

It beggars belief that Labor thinks it can quietly slide through legislation which could see the ATO go through the tax records of every Australian who has received a company dividend from 2016 without a murmur.

Shareholders who receive dividends are not to know how they are funded by the company which is paying them out.

But if the proposed law is introduced, millions of shareholders could find themselves liable to ATO review and stripped of past franking credits – and have to pay back tax – for reasons which are entirely out of their hands.

It is hard to think that this is a measure which the government wants to be known for.

In comments on Wednesday, Financial Services Minister Stephen Jones implied that the government would look seriously at the submissions made to it – but he stopped short of actually confirming that it would drop the idea entirely or even the idea of it starting from 2016 dividend payments.

Retrospective legislation is legal but it is a bad precedent.

Jones tried to describe the situation where companies used franking credits to gain a tax advantage in capital raisings as not in line with the intent if the dividend imputation system introduced by Paul Keating

But Sandon, in its submission, argues that not only can it not see the problem which is being solved for here, but that the ATO can deal with any potential tax avoidance problem under its existing powers or with a much more narrowly worded bill.

Sandon says the proposal puts a heavy financial burden on shareholders who had nothing to do with how the company arranged its affairs prior to paying out the dividend.

In his submission, Wilson also lets fly. He describes the proposal as “inequitable in its current form and appears to be an attempt to unnecessarily revise the current franking system”.

If the proposed problem to be solved is minor tax avoidance measure – estimated in 2016 to only raise $10m – the question to be asked is why the government is prepared to risk reviving the memories of 2019, small shareholder anger and uncertainty about its future motives for such an amount? Why squander so much political capital with ordinary shareholders and risk the revival of fears that there are more changes to come – or that its promises can’t be trusted?

The proposal is a political gift to Liberal leader Peter Dutton who can cheerfully argue that Albanese is not keeping to his promise not to change the franking credit system.

Sandon describes the proposal as “groundhog day” which will have a “draconian impact” on mums and dads, super funds and retirees.

The proposal has a way to play out as the government now goes through the submissions.

How it is handled will now be watched closely as case law on the government’s real approach to franking credits and its benefits for small shareholders.