Govt declares ‘franking credits will stay’

Mike Taylor

Managing Editor/Publisher, Financial Newswire

21 November 2022

The Federal Government has reinforced that it has no intention of moving any further on dividend imputation with Assistant Treasurer, Stephen Jones, having driven home the point to accountants.

Addressing the Institute of Public Accountants, Jones declared: “Franking Credits will stay – end of story, full stop”.

“This policy is not about changing franking credits. Ordinary mum and dad investors will continue to receive their franked dividends. And they can still participate in share buy backs,” he said.”

“Our change is only to align the tax treatment of on‑market and off‑market trades. That is fair and as it should be. This measure strengthens the integrity of our system. It will ensure there is one simpler, clearer way of taxing share buy backs.”

Jones said the measure ended an unintended incentive for corporates to buy back shares off‑market instead of on‑market.

“It is not what dividend imputation was designed for and it is not fair – not to shareholders and not to taxpayers. Dividend imputation is there to give companies a way of allocating tax credits to their shareholders when they distribute franked dividends. That purpose will remain,” Jones said.

“It is not there for corporations to exploit the tax treatment, at taxpayer expense, of off‑market share buy‑backs.”

“Such deals can give preferential tax treatment to large institutional investors and often run into the billions of dollars.

Though relatively rare, averaging one or two a year, when they do happen there is a very big budget impact. In 2018 BHP did an off‑market trade with some of its large investors to buy back $8.5 billion worth of shares. The market price on the ASX was $32.14, but BHP only paid $27.64 off‑market.”

“This year Westpac employed the same mechanism to get a discount on its $3.7 billion off‑market share buy‑back. And last year Commonwealth Bank got a discount on its $7bn off‑market share buy‑back.”

“To be clear, this is not a criticism of the companies or the funds that have taken advantage of the loophole. It’s not illegal, and corporations will still be able to issue special dividends.”