Franking credits shake-up ‘double tax by stealth’

A fund manager says the government’s franking credits shake-up will deliver “double taxation by stealth” and significantly increase the budget deficit.

Fund manager Geoff Wilson. Picture: John Feder/The Australian

Fund manager Geoff Wilson says the government’s franking credits shake-up will deliver “double taxation by stealth”, significantly increase the budget deficit and impose “long-term and unintended consequences” on Australian companies and investors.

The Wilson Asset Management chair, whose company manages more than $5bn for 130,000 investors, said changes to Treasury laws impacting the franking system would spark an investment plunge.

A submission by Mr Wilson and WAM chief financial officer Jesse Hamilton to a Senate economics committee inquiry into Treasury laws amendments, which will report back by May 26, said the two franking measures would weaken a system that has “underpinned Australia’s economy … over three decades”.

“Treasury’s proposed policy will have a significant impact on Australian companies and their ability to pay fully franked distributions to their shareholders and will delay and/or discourage the normal process of investment, economic growth and capital formation in Australia,” the submission said.

“The proposed legislation will promote debt over equity and discourage large, mature companies from paying tax in Australia (or encourage them to defer or minimise their tax as much as possible), leading to a significant increase in the budget deficit.

“It will result in the unfair reintroduction of double taxation by stealth and negatively impact charities, low-income earners, SMSFs and retirees – not the ­institutions/investment funds as communicated by government.”

Submissions to the Senate inquiry closed on Friday, three weeks after Liberal senator Andrew Bragg won support to establish the parliamentary probe and attacked the legislation as a “dangerous and underhanded measure to stop the payment of franked dividends”.

Assistant Treasurer Stephen Jones has said the government is closing “an unintended loophole that allows large corporations to effectively gain a taxpayer subsidy for off-market share buybacks”. He said the legislation made “no change to the fact companies can still issue dividends that ­attract franking credits”.

The government has flagged its two measures will raise $550m by aligning the tax treatment of off-market share buybacks and $10m a year to stop companies paying dividends and restricting access to franking credits for individual shareholders.

Under current tax rules, when a company pays or credits dividends that have been franked, investors are entitled to a franking offset for the tax the company has paid on its income. The offset covers or partly covers the tax payable on dividends.

Mr Wilson – who led the grassroots campaign against Bill Shorten’s policy banning excess franking credit refunds ahead of the 2019 election – said Australia must not follow Britain’s “disastrous” path that led to the abandonment of its Advanced Corporation Tax system.

“One of the many great attributes of the Australian franking system is that it encourages all Australians, from mum-and-dad investors to large industry and superannuation funds, to support and invest in Australian companies,” Mr Wilson’s submission said.

“The fact the UK doesn’t have a dividend imputation, or franking credit system … has led to a drastic fall in UK investment in UK companies. In 2000, the share of the UK stockmarket owned by UK pension funds and insurance companies was 39 per cent. By 2020 this figure has plummeted to only 4 per cent.”