• The proposed amendment to franking credit laws could leave less money in shareholders’ pockets
  • What exactly are franking credits?
  • SMSF CEO Peter Burgess speaks out against the proposed legislation

 

The Albanese government is pushing for amendments to the franking credit tax law that could have a big impact on ASX shareholders.

In February, the government introduced a proposed bill that would restrict companies from paying franked dividends if the funds were paid from capital raising such as the issuance of new shares.

What does this mean?

For shareholders, it means that if you own stocks in a company that undergo a capital raising during the period, you could have your franked dividends disallowed. In this case, you would have to pay full tax on those dividends based on your income tax bracket.

The government said the proposed changes will add to the tax coffers to the tune of around $600 million over the next five years.

 

What are franking credits?

If you own an ASX stock that pays dividends, franking credits will keep more money in your pocket come tax time.

The way it works is that when companies pay net profits out as dividends to shareholders, they will have already paid corporate tax on those profits – currently at 30% in Australia. This tax paid is called franking credits.

For example, if BHP generates a net profit of $100m, pays $30m in corporate tax, and decides to distribute the remaining $70m as dividends, shareholders would be waived on the $30m tax already paid in the form of franking credits.

In other words, franking credits act as a tax credit that shareholders can offset against tax on their dividend income.

If the shareholder’s marginal tax rate is less than the 30% corporate tax rate, they may even be entitled to a tax refund as a result of franking credits.

 

SMSF CEO speaks out against the amendments

The SMSF Association, which represents Australia’s self managed super fund sector, has raised concerns about the proposed legislative change.

The SMSF admitted that current laws are being manipulated by some companies to facilitate the inappropriate release of franking credits.

However, the SMSF also believes the new law will inadvertently disadvantage many growing companies that genuinely need to raise capital.

SMSF CEO Peter Burgess says he has concerns over the new legislation, including “several items that must be tested” to determine whether a dividend distribution is funded by a capital raising and therefore ineligible for franking.

“In our opinion, what’s required to avoid the amendments applying to legitimate and normal business operations is a broader list of matters to determine whether a distribution satisfies the requirements of being funded by a capital raising.”

Burgess said many companies reinvest profits and raise capital to pay dividends simply as a prudent cash flow management strategy, and have nothing to do with tax avoidance or the manipulation of the franking system.

“Disallowing franking in these situations would expose the shareholders to double taxation,” said Burgess.

“Company profits would still be subject to tax, but the shareholder would receive an unfranked dividend with no franking credit to offset the tax paid by the company.”

To avoid these unintended consequences, Burgess said the proposed amendments should be modified to make it clear the law will not apply to dividend distributions in situations where a company has made a genuine taxable profit.

“Those profits have been applied in funding the operations of the company, and the company now intends to distribute those profits as a dividend,” said Burgess.

Assistant Treasurer Stephen Jones, however, said the government is only closing “an unintended loophole”.

He said the proposed legislation would make “no change to the fact companies can still issue dividends that ­attract franking credits”.

 

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