One of the reasons the Morrison government held on in last year’s election was the fact it would not touch franking credits, whereas Labor wanted to overhaul it.

Franking credits allow recipients of dividends to not pay tax on that income if the company has already paid tax. Essentially it avoids double taxation.

A change in 2001 allows them to take the credits as a cash refund if they don’t pay tax or don’t have a tax bill. Labor wanted to stop these cash refunds.

Among the biggest advocates for the status quo were fund managers like Wilson Asset Management’s Geoff Wilson.

Several months on, he still thinks ‘if it ain’t broke don’t fix it’. But he admitted in a conference call on Wednesday the government may have no choice.

The Morrison government’s stimulus package will equate to over 10 per cent of Australia’s GDP. With tax revenues dry, he conceded making changes to franking credits is one avenue open to the government.

“Someone has to pay for [the stimulus] at some point in time,” Wilson said.

“Our view on franking [credits] has always been it is a logical system that encourages companies to pay tax in Australia, employ Australians and encourage people to invest in Australian companies and encourages companies to raise equity rather than debt.

“We’ll see how these companies perform versus highly geared companies and I think you’ll find they perform well.”


Keep it equitable

Wilson hopes any changes ensure all recipients of franking credits are treated equally.

“Our concern was the inequitable nature of Labor’s proposal where you could have five individuals and get five different outcomes,” he said.

“If anything is done it should be fair and equitable.

“I believe the current system encourages the right behaviours. If they need to look at it, I’d assume everything is on the table and you couldn’t rule it in or out.”

NOW READ: Wilson Asset Management: The bear run isn’t over yet, but investors need to prepare for the rest of COVID-19 and beyond