“Shareholders in companies transitioning to reduced tax rates over the next 10 years could lose their entitlement to franking credits for tax paid on profits at higher rates in the past.
“The draft law is designed so that as the tax rate reduces, so too does the maximum franking percentage that can be attached to dividends.
“This means that retained profits that have been taxed at 30% will only be able to be distributed with franking credits at the reduced corporate tax rate of the day.
“When it comes to reviewing their dividend pay-out ratios, boards will be faced with a choice of ‘use it or lose it’. Pay out franked dividends before a cut comes in and shareholders get optimal utilisation; wait until after a cut, and shareholders lose credits on the tax rate differential.”
Stuart Dall stressed that the company tax rate cuts were essential for maintaining Australia’s economic competitiveness, but believes that this impact may not have been fully thought through.
“The last major corporate tax rate cut across the board was around the turn of the millennium, when the rate was cut from 36% down to 30%.
“But back then, franking credits weren’t refundable for superannuation funds and lower tax rate investors. It’s the super funds and institutions that are the backbone of Australia’s equity markets.
“This is a massive issue that will need to be managed.
“All Australian shareholders, institutional and retail, are going to be impacted one way or another by this – they’ll be expecting to get full credits they are entitled to for tax that has already been paid to the government.
“But they’re going to miss out where profits and franking credits are retained, or otherwise we’re going to see companies looking to flush out profits earlier than they otherwise would.
“Corporate Australia can ill-afford to have their values downgraded by analysts who don’t see the full economic value of franking credits coming through.
“As a consequence, that’s going to make capital management challenging – with less earnings being retained for reinvestment, finance directors and treasurers will be looking for alternative sources of capital.”
For further information please contact:
Stuart Dall, Partner, Pitcher Partners, 0431 826 050
Sabine Wolff, Media and Communications Advisor, Pitcher Partners, 0419 529 577