AFIC in ‘no danger’ from Labor’s franked dividend changes

The nation’s oldest listed investment company has downplayed the impact of Labor’s proposed legislation on franked dividends.

AFIC, led by managing director Mark Freeman, is wary of retrospective taxing. Picture: Aaron Francis

The nation’s oldest listed investment company, the $9bn Australian Foundation Investment Company, says it is in “no danger” from the Albanese government’s proposed changes to the dividend franking regime.

Speaking at the AFIC annual meeting on Tuesday, chief financial officer Andrew Porter told shareholders the LIC would not be impacted by the legislation, which seeks to prevent companies from paying out franked dividends funded by capital raising.

But he took the opportunity to argue against the retrospective element of Labor’s proposal.

“The legislation was intended to specifically address where companies issue capital in order to then free up liquidity … to pay a dividend. This was the subject of a tax alert from the ATO in 2015 and initial government legislation in 2016,” Mr Porter said.

“With this specific legislation, it’s very narrow. AFIC and the other LICs are in no danger from it because we don’t do that. But (the government) does need to be careful in terms of how they word the legislation and if they ever use retrospectivity,” he warned.

In a move that shocked investors, Labor last week took fresh aim at dividend imputation credits despite the contentious issue costing the party the 2019 election.

The government is putting forward draft legislation to target franking credits on special dividends paid out since December 2016.

Treasurer Jim Chalmers insisted the legislation was a “very minor change” and a loophole closure first proposed by the Coalition six years ago.

WAM boss Geoff Wilson has slammed the franking changes as a ‘cash grab’. Picture: John Feder

Distributions that are paid outside or additional to a company’s normal dividend cycle and are funded by capital raisings and equity issuances will no longer be allowed under the proposed change.

But critics, including Wilson Asset Management’s Geoff Wilson, blasted the government for the move, labelling it a cash grab.

Despite his assurances that the legislation would have no impact on AFIC, Mr Porter did note the fears in the market.

“First of all, there are some concerns with the looseness of the wording of the legislation now it‘s finally come out,” he noted.

“Secondly, there are certainly concerns with making it retrospective. Retrospectivity in tax legislation is normally never a good idea.

“And thirdly, there is the general fear that there may be a track record with regard to franking credits. On the latter, we‘re all very strongly in favour of the franking system and so will take action if we need to.”

Earlier in the meeting, the ASX-listed investor provided shareholders with an update on its performance to August 31, which showed a negative 6 per cent return for the prior 12 months compared to the benchmark S&P/ASX 200’s negative 2 per cent.

Energy and utilities holdings were the biggest positive drivers in the portfolio, but weren’t enough to offset the negative impact of its positions in IT, consumer discretionary, real estate, healthcare, industrials and banks, all of which were in the red for the year.

AFIC portfolio manager David Grace said equity markets were facing challenges on a number of different fronts but that the fund was keeping its long-term view.

“With so much uncertainty, investor sentiment becomes very short term. Share prices are now very much traded on the news of the day,” he said.

“While we don‘t know how all the current issues get resolved, we remain committed to holding a diversified portfolio of quality companies over the long term. Uncertain times provide opportunities to buy our preferred companies at attractive prices.”

Originally published as AFIC in ‘no danger’ from Labor’s franked dividend changes