Treasury points to ‘minimal’ use of franking credits regime

Mike Taylor

Managing Editor/Publisher, Financial Newswire

16 May 2023

In the face of high levels of angst directed against the Government’s proposed franking credit changes, the Federal Treasury is arguing that use of the pre-existing regime has actually been minimal.

Answering questions on notice from the Senate Economics Legislation Committee, Treasury officials claimed “there has been minimal activity associated with franked distributions funded by capital raisings observed by the Australian Taxation Office (ATO) since the measure’s announcement in 2016.

It said this was consistent with taxpayers changing behaviour in response to the retrospective start date announced in the 2016-17 Mid-Year Economic and Fiscal Outlook (MYEFO).

At the same time, Treasury said the initiative was not intended to provide a competitive advantage to larger more established companies over smaller less well-established companies, stating “it would prevent companies of any size from entering into artificial and contrived arrangements to raise capital for no commercial purpose and use this capital to fund franked dividends to shareholders”.

“We do not believe that the legislation will prevent small companies from paying dividends in ordinary commercial circumstances and so should not have any effect on their cost of capital or competitiveness with larger companies,” the Treasury answer said.

Schedule 5 of the legislation deals with franked distributions funded by capital raisings with submissions from major stockbroking firms suggesting that it will encourage emerging to medium-sized firms to take on debt rather than raise equity to finance their growth activities.

They are arguing that there are some serious unintended consequences likely to flow from the proposal.