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The danger in Labor's new franking credit proposal

We all remember the 2019 franking credit proposals that contributed materially to the Labor Party's election loss and helped to deliver Scott Morrison's "miracle". A major problem with that proposal was that it had many unintended consequences. The same can be said for Labor’s new proposal to stop the payment of franked dividends funded by raising capital.

Paying company dividends

In basic terms, before a company can pay a dividend, it needs to:

  • Make a profit and
  • Pay tax.

The after-tax amount is credited to retained earnings and a dividend can be paid to shareholders. The situation may arise, however, where a company has spent its earnings on operating the business and, as a result, doesn’t have the cash to pay a dividend. In such circumstances, where the directors consider payment of dividend important, they may seek to raise funds through borrowing money or issuing more capital.

According to Treasury documents, the new Government proposal purports to:

“… prevent companies from attaching franking credits to distributions to shareholders made outside or additional to the company's normal dividend cycle, to the extent the distributions are funded directly or indirectly by capital raising activities that result in the issue of new equity interests.

On the face of it, many would think this sounds reasonable. However, like with a lot of tax legislation, the problem rests in the detail and practical implications.

Devil in the detail

The proposal will make the job of a company director more difficult given its far-reaching application. Paragraph 1.33 of the explanatory documents states the following in relation to a capital raising:

It is not necessary that the relevant purpose be the sole, dominant or primary purpose, only that it is more than incidental to some other purpose.”

In other words, if it can be argued that the capital raising has some relationship to the dividend, then the entire dividend could be deemed unfranked.

Anyone who has watched how listed companies operate will see that their capital requirements are constantly changing. One minute they might be paying dividends and returning capital to shareholders. The next minute, due to a market change or business challenge, they may need to borrow money or raise capital to shore up their balance sheet. A few months later, they might be able to again return money to shareholders.

The Westpac example

An example quoted in the press in recent weeks is the November 2019 dividend paid by Westpac. A franked dividend of 80 cents was issued on the same day that the bank announced a $2.5 billion capital raising. The funds from the capital raising were received prior to the dividend being paid. But under the Government proposal, a dividend payment must be unfranked if funded from a capital raising even if the company has franking credits available for distribution.

Will Westpac be caught by this proposal, which is backdated to 2016? I think the answer is 'possibly'. There are some arguments for and against. What is clear, however, is if they didn’t pay the dividend, then the capital raising could have been smaller. 

But was Westpac undertaking a contrived arrangement? Was the bank carrying out some mischief that needs to stop?

I think most would agree that Westpac did nothing wrong. Banks have always balanced the paying of franked dividends to shareholders with the need to raise capital at times to secure their balance sheet.

This quandary that Westpac directors face if this new legislation is introduced will be repeated in boardrooms throughout Australia. There should be nothing wrong with a company raising capital to strengthen their balance sheet. There also should be nothing wrong with a company paying retained profits to shareholders as fully franked dividends.

A recipe for worse outcomes

Giving the Tax Office the discretion to question the motives of directors is likely to result in worse outcomes as decisions are made to meet legislative requirements instead of meeting the interests of the business and shareholders.

The Treasury document states that the purpose of these changes is to:

“ … prevent entities from manipulating the imputation system to obtain access to franking credits”.

It needs to be noted there is already strong anti-avoidance legislation in place to stop manipulation without intruding on the decision making of boardrooms.

It is clear that governments needs to be vigilant in relation to tax legislation as companies seek to exploit loopholes. However, it is my understanding that the ‘problem’ this legislation is trying to fix is not widespread. As a result, it is feared that business and shareholders will be worse off without any perceptible improvement to the tax system.


Matthew Collins is a director of Keystone Advice Pty Ltd and specialises in providing superannuation tax, estate tax and structural advice to high net wealth individuals and their families. This article is general information and does not consider the circumstances of any individual investor. It is based on a current understanding of related legislation which may change in future.


October 26, 2022

We are self funded retirees with an income of about $55,000 pa including approx $6,000 in franking credits. We draw down on some cash assets each year to maintain our standard of living (we all know that the recommended income pa for retirees for a moderate living is approx $66,000). If the franking credits are not refunded to us, we then draw more of our cash assets which in turn means that our total assets will decline at a fast rate to the extent where we will become pensioners - funded by Government (taxpayers). How is this good economic sense - given that there would be many other retirees in the same position as us?

March 14, 2023

We're in exactly the same situation. Labor always refer to new taxes on battlers, as cost cutting, when there is never a single dollar cut from a massively, bloated, and ineffective, bureaucracy!? Wait until they introduce their ESG laws, to force companies to put their ESG project spending, before shareholder profits! This has just been blocked in the US, and our Labor Party has signed up to Biden's programem, aside from Chalmers writing his essay on exactly that. 

Warren Bird
October 25, 2022

I note that this particular issue is still being ''consulted on'' by Treasury.
The headline grabbing announcement in the Budget last night about changing the treatment of off-market share buy-backs to switch income from capital gains to franked dividends is a different issue and one that I don't have problems with, if the AFR's explanation is accurate. On-market and off-market share buy-backs should be treated the same and, if an income actually is a capital gain then that's how it should be taxed.
Here's a link to the AFR article

October 17, 2022

All the commentary relates to dividends on ordinary shares.
How, then, might the proposed change affect franked debt instruments. eg Bank Hybrids?

October 15, 2022

Here's a detailed retort from the Wilson stable:

October 14, 2022

The Retrospective consequences attached to this proposal are abhorrent.

October 13, 2022

If a company has a pay out ratio of say 50%, then all of those Australian shareholders will receive their franking credits for that year .
The other 50% of retained profit by the company should have no tax credits to be held for future distributions.
The tax on retained profits for that year belongs to the tax office .
How a company spends its retained profits, should have nothing to with the franking system.
Companies get tax breaks on capital invested.
All that would be happening is that companies would be paying their share of tax each year.
The franking system is a great system and should be kept as simple as possible.

October 13, 2022

THIS ISSUE seems like a VERY GOOD REASON to RESURRECT the political career of TIM WILSON , the main-man who overturned Bill Shorten's political aspirations and retained "FRANKING CREDITS" for us in their current form ! Of course , the then Shadow-Treasurer , Chris Bowen sealed the issue with his contemptuous comment : "If you don't like our policies, don't vote for us". How I wish he had been their "spokes-person" at the last election ! It seems that Labor has now vindictively revisited the issue and is intent on inflicting pain on it's opponents ! Let us hope that this Biblical aphorism returns to BITE LABOR : ""As a dog returns to his vomit, so a fool repeats his folly" is an aphorism which appears in the Book of Proverbs in the Bible — Proverbs 26:11 It means that fools are stubbornly inflexible and this is illustrated with the repulsive simile of the dog that eats its vomit again, even though this may be poisonous. Dogs were considered unclean in Biblical times as they were commonly scavengers of the dead and they appear in the Bible as repugnant creatures, symbolising evil.......and I am sure that as a SMSF "self-funded-retiree" I am not the only one who feels that they are being "dogged by the dogged dogs of Labor" ! TIM WILSON.............YOUR SKILL AND EXPERTISE IS NEEDED AGAIN ...........time for a political resurgence my friend !

October 17, 2022

Good on you! well said

John Goulter
October 20, 2022

Labor are hell-bent on killing franking credits. SMSF are their main targets because they want everyone’s superannuation safely ensconced in the Union run super funds so that Labor has a never-ending supply of election funding.

Harold Hogan
October 30, 2022

Tim Wilson did an outstanding job so that self fund retirees could retain their franking credits. His hard and sustaining work on this issue gained the support of many of us self funded retirees and I'm not referring to the upper echelons.

Mark C
October 13, 2022

Thank you Matthew Collins for highlighting this important issue and providing examples eg Westpac case to highlight the stupidity of this retrospective legislation and unintended consequences. You are a scholar!

Tony Dillon
October 12, 2022

Some thoughts on the proposed legislation:

1. It could provide a disincentive for Australian companies to conduct capital raisings for legitimate purposes, which would be to the detriment of the economy.
2. Any savings budgeted for the proposed legislation would be offset by disinvestment as outlined in 1. Unintended consequences are inevitable.
3. It could provide a disincentive for investors, many being self-funded retirees, to invest in Australian companies for income, if expected income gross of franking credits is lowered because of the proposed legislation.
4. The retrospective element of the proposed legislation is extremely unfair to those who invested in good faith before now. To impose retrospective tax burdens at a time of uncertainty in the economy, rising interest rates, and cost of living pressures, would be a significant setback for any investor, let alone those trying to fund retirements. And accounting and ATO costs in enforcing retrospectivity, would not be insignificant.
5. The proposed legislation goes against the spirit of the imputation system, which was designed to ensure that investors were not double taxed on company profits distributed as dividends, and that spirit should be preserved.

October 12, 2022

The most odious aspect of this proposal is it enables the ATO to deny credits for taxes already paid by the dividend paying company, depending on its cash flow position. Noting that symmetry or equity has never been something any tax agency can boast, will ATO waive any tax bills if the taxpayer didn’t have the cash but had to borrow or raise capital? And how will this align with the lofty claims of the government to increase capital expenditure for enhancing our productive capacity, only to hit the owners with this frankly Frankenstein frolic?

October 12, 2022

Is 2016 when Shorten lost the election over this issue?
I have been wondering when Albo will trip over his own stupidity (they all do sometime), this seems to be it.

Regardless that many here understand the purpose of franking, a huge number of people I speak to don't. They really believe the Labor spin of "tax refunds to the rich."

Simon N
October 13, 2022

The irony of the "tax refunds to the rich" is that the retrospectivity of this proposal will do exactly that while extracting tax from others.
Tax payer A. employment income $90,000, Full franked dividend $7,000, franking credit $3,000 taxable income $100,000. Tax payed in F21-22 $22,967. Now retrospectively remove the franking, taxable income $97,000 tax payable $21,992 so tax payer A receives a back dated refund of $975 plus interest.
Tax payer B. Sole income is fully franked dividend of $7000, franking credit $3,000, taxable income $10,000 tax payed nil. Now retrospectively remove the franking, taxable income drops to $7000 and the tax payer owes the government the $3000 which they previously received as a refund.
Given the logic is that all dividends that are part of a DRP would be caught in this, anyone owning bank shares would need to readjust 6 years of tax returns, with some people and entities with low incomes owing (comparatively) large tax bills and others on high incomes receiving refunds.

Simon N
October 13, 2022

Replying to myself here. I bothered to go and look at the exposure draft and explanatory materials on the Treasury website (under consultations if you are interested). If appears that if the dividend is paid according to established practice of the entity then franking will still be allowed, but if not according to established practice AND involves capital raising, then franking would not be allowed. So existing DRPs should not be impacted, but a company considering establishing one might get caught.

October 17, 2022

Yes Michael, you are very right. Makes one wonder who on earth came up with current proposal? It was Chris Bowen who in debate was unable to explain the question posed "how do franking credits work?" on television and he couldn't and didn't.

Peter Brock
October 12, 2022

It’s a very slippery slope when politicians make retrospective laws. There are such obvious issues in making something that was perfectly legal at the time, suddenly and magically illegal. It becomes a picnic for lawyers, appeals and unintended consequences.

October 12, 2022

Thanks for highlighting this The initial and biggest problem is retrospectivity. The proposal was initally introduced by the LNP government but never enacted. It was left and now ALP have used seeming the same drafter proposal which included C, 1.53 'to be implemented from 19 December 2016'. Much has happened since including APRA insisting banks raise a huge amounts of extra capital when Covid struck. They subsequently [much later] paid greatly reduced dividends from actual profits. At a minimum the date must be changed form 2016 to 2022 . The legislation also need major clarification in other respects

October 26, 2022

The biggest problem with the elimination of franking credits from dividends where it is deemed to have been in any part due to a capital raising [as arbitrarily at the complete discretion of the ATO] is that it was drafted in 2016, never enacted, never then intended to be retrospective, and still has the original date of 19/12/2016. It is the retrospectivity now included that is potentially an entrapment of innocent taxpayers, who paid as required under existing legislation. If the franking credits already included are reversed, all super funds, all university endowments, research insitutions and major charities [cancer funds, heart foundation, flying doctor, red cross etc] , with investments eg from bequests and donations; private schools; land councils etc., would need to be reassessed and pay back franking credits. And ALP could not play favorites as in 2019 proposals re franking -- e g exempt Industry super funds while penalising SMSFs. If the actions are deemed now retrospectively to be illegal, the government could not then authorize certain institutions to behave illegally

Tony Reardon
October 12, 2022

The underlying problem is the overly complex Australian tax system with interactions that result in possibly unexpected outcomes. Dividend imputation is a typical instance with complexity rather than simplification at the heart of the system. A company has two possible sources of funds – debt and equity. It must pay interest on debt and must repay it; it has the option to pay dividends to equity holders and never repays it. However, the payments to the different investors are treated differently as interest is deducted as a business expense by the company and attracts full taxation in the individual investor's hands, whereas we have the complex imputation scheme for dividends. The simple, fair solution is to allow distributions to equity holders as a deductible expense to the company as if they were interest and tax these fully as part of the recipient's income. This levels the playing field for international and domestic investors, removes the bias within a company for one form of capital over another and is far less complex to understand and to administer. Given that both companies and individuals pay tax on a PAYG basis this should not impact tax timings. This would also have the effect of a substantial drop in the notional tax rates of companies and would make Australia a far more attractive destination for overseas investments.

Warren Bird
October 12, 2022

Tony, imputation is simple. Income you earn gets taxed at your tax rate. If you've overpaid (eg because more tax was taken out of your earnings before you were paid them than you should have) then you get a refund. We're all used to getting tax refunds. Imputation credits are just part of that. It's messing around with changes like this proposal that brings on complications.

October 15, 2022

I agree fully Warren especially your last line.
It's messing around with changes like this proposal that brings on complications.
As every govt seems to do.....Make it more complicated

October 12, 2022

"allow distributions to equity holders as a deductible expense to the company as if they were interest and tax these fully as part of the recipient's income. This levels the playing field for international and domestic investors": International shareholders would then pay no Australian tax whereas Australian shareholders might pay income tax on gross dividends under threat of menaces by ATO.

October 12, 2022

why would you want to level the playing field for domestic and international investors? the current imputation system means than the effective company tax rate for domestic shareholders is ZERO, but 30% for international shareholders. The more overseas people pay the Australian government in tax, the less I have to pay, and that is a great thing. In fact, lift the company tax rate, even more tax collected from overseas shareholders (who won't get the benefit of imputation credits) and less tax for me to pay. Maybe taking it to the extreme, overseas shareholders will sell their shares in Australian companies, which will reduce the share price, which will mean that I will be able to buy those shares cheaply (and we can get Australian companies back into Australian hands). Yes, cash dividends will be lower, but imputation credits higher, so overall no change for Australian shareholders income

Warren Bird
October 13, 2022

The playing field is actually fairly level. The average income tax rate is (or at least was a few years ago) about 30%. Some pay less, some pay more, but that's the average. So non-residents who earn through share ownership pay 30% via that company tax rate.
Contra to John's response, which is true in a technical sense but misses the point that its not about "the company tax rate" but about the tax rate you pay whatever the source of your income.

And while I'm here, I should point out that this Labor proposal isn't just about franking credit refunds to low tax payers. The removal of franking from dividends seemingly funded by a capital raising affects ALL income tax payers. Those on the top marginal rate will now effectively be paying 75% marginal rate on those earnings instead of 45%. Middle income earners in the 32.5% bracket will be paying 62.5%. Just another reason why this isn't "a storm in a teacup" as someone said in a comment on this topic yesterday.

October 12, 2022

We can thank Turnbull and O'Dwyer if the current government tries on retrospectivity with any legislation, especially that affecting taxation and superannuation. I wrote to both of them, my local federal MP and all of SA's governmental Senators (not that any of them bothered to reply) explaining that the retrospective changes they proposed to make to superannuation would give any future government carte blanche to do the same. LINO, the both of them.

October 12, 2022

The principle underlying franking credits is the prevention of double taxation. Should corporations continue to manage their capital as they do now, the effect of this proposal would be to dramatically increase the pool of franking credits held by companies with the comcomitant increase of shareholders' cash held by the ATO. The ATO would keep money that belongs to someone else, possibly forever. If the proposal were implemented, the only beneficiary would be the government's accounts - more cash held, but with a matching increasing in liabilities. There is no benefit to anyone else: businesses would have to manage cashflows in a different way, shareholders (including super funds) would see the value of franking credits eroded by inflation. Somehow, I don't see the government indexing the value of franking credits until paid out. Overall, one has to ask "why"? The proposal is feeble and should be abandoned.

October 12, 2022

The old proposal from Labor was easily manipulated. Big superannuation funds could just keep their pension (zero tax) members and their accumulation (15% tax) members in the one entity (as they currently do). Then had a (relatively) small tax liability and internally account for the different tax on each type of member - ie the pension members received all the benefits of the franking credits. SMSF did not generally have this ability because typically both husband and wife are in pension phase - so in this case, there would not be a refund of franking credits. BUT, the easy way to get those benefits, sell the asset BEFORE the dividend, get the benefit of the franking credit in the sale price (share price falls on ex div date all other things being equal), and buy back shares after the dividend had been paid - you have to be a bit careful here, somehow proving that the whole scheme wasn't for tax purposes, but that is easily achieved by selling ANZ and buying NAB - you just have to say that you thought NAB was a better investment, and the tax office can't prove otherwise. So, what labor thought was going to be a winfall would never have occurred

October 12, 2022

How many pension stage people have the ability to trade on the share market?

October 19, 2022

billy, I don't have time to look into it yet, but the last scheme proposed was blatantly discriminatory against SMSFs at the expense of the big funds. Is this the same? And is it true it is retrospective because I can't think of a quicker way to destroy business investment capital? (well, actually I can)

Warren Bird
October 12, 2022

Once again we have a proposal that cuts across the sensible tax policy reason that we have imputation in the first place. Which, I remind you, is to ensure that people who earn income from owning shares in a listed company are taxed in the same way as people who earn income from owning equity in a private unlisted business. That is, all income paid to individuals should be taxed at the individual's tax rate; income from different sources shouldn't be taxed differently. This proposal treats income that happens to be paid around the same time as a capital raising as different from income paid at a different time in the company's strategy even though it's really coming out of profits on which tax has already been paid. The impact is that the individual receiving that income will pay 30% more in tax than they should. This of course includes those who are on a zero tax rate, who will not receive the refund of the 30% tax already taken out of their earnings. So, to Bill who commented above asking if this is just a storm in a teacup, no it isn't. It's a degradation of one of the best tax reforms Australia has ever introduced and makes us a world leader in integration of the company and individual income tax systems. It reflects a misunderstanding of the principles of good tax and budget policy. If this policy change is permitted then it sets a precedent for other poorly based decisions to be made. As I said during the 2019 debate on franking credits, if the government wants to increase the tax take by increasing taxes on certain cohorts, then change the tax rate of that cohort. Do it overtly and transparently, making it clear who it is that you wish to tax at a higher rate and own the political consequences of that decision. I would object to changing the tax rate for earnings in super funds that are in pension phase on capital amounts below the threshold for tax-free earnings, but at least if what they did was to change that to 5, 10 or even 15% then we could see that for what it is - a change in tax rate that is clear and obvious, not a hiding behind something else that sounds sensible to those who don't think too much about how good policy decisions are made.

Jon Kalkman
October 12, 2022

Most countries tax company profits twice. Once as company tax and again as personal tax on dividends received. Result: countries like USA pay little in dividends, they prefer share splits and share buybacks. Warren Buffett never pays a dividend. Our franking system ensures that foreign investors always pay tax at the company rate, because it is extracted before they receive their dividend. Our franking system ensures all Australia shareholders pay tax on their share of company profits at their personal tax rate, BUT their taxable income is their dividend PLUS the company tax prepaid to the ATO before they got their dividend. That is why the dividend must be “grossed up”. If the dividend is $700, their taxable (grossed up) income is $1000. This is the bit people have difficulty understanding - taxpayers are required to pay tax on income they never received and is held by the ATO. But because it is held by the ATO, that money can be used as a tax credit to pay some or all of their personal tax liability. So if you are a tax exempt taxpayer, how much tax should you expect to pay on that $1000 of taxable income? If that $300 tax credit is not refunded as cash, you have paid 30% tax on your taxable income. If there were no taxpayers whose marginal tax rate was below 30%, there would be no refunds of unused franking credits. A franking credit is NOT a refund of tax never paid: it is a refund of income never received

October 12, 2022

I'd still be giving up on this Jon,such a simple system and people refuse to see it.
The US I'm not sure,I thought the same as you and then I was told that their tax system had changed under Bush 2,and they had a system much the same as here.I wasn't really confident in the person giving me the info though.
I think the UK had the same system as here until around 1997 or8 when Brown changed it.Now the first £2 K is tax free.Then a very strange CGT.The first £12K of gain is tax free.So people sell shares on the basis of "I don't want to forego that tax free £12K every year".I wonder how much they cheat themselves out of by not leaving it alone to compound,and then taking it out after retirement.They have a complicated system for putting money into ISAs ,SIPPS and stakeholder pensions ( much the same as super here) I gave up trying to understand it years ago now.

I like the Australian system,it is so simple. My dividends are taxed exactly the same as if I had gone to work to earn that income Your last sentence explains it perfectly.

October 12, 2022

Would a DRP be caught?

Matthew Collins
October 12, 2022

Well it is dividend that is directly associated with the issuing of more capital! I haven't seen them mentioned Cam (and I sure they will remain for now) but if you follow the logic of the treasury document, they are exactly the type of "mischief" that the Government is trying to stamp out.

October 20, 2022

I cannot see why a DRP would be caught out under the existing system of franking credits because you only buy additional DRP shares from the nett dividend paid. (i.e. LESS FRANKING CREDITS.) However you do receive additional dividend payments, plus increased franking credits at the next dividend payment period, thereby compounding your income at the expense of receiving cash payments.

Richard Thomas
October 12, 2022

Quite right there are unintended consequences. Retrospective legislation is very bad policy for a start. the business community were adhering to the existing policy from 2016 and now the Govt. says that was wrong?? It doesn't matter that the previous initiated this proposal and then let it lapse--for good reason-bad policy. It is simply the Govt.'s excuse to start winding back franking credits permanently. We really cannot trust them.

October 12, 2022

Is this a storm in a teacup? The battle to keep franking credits was played out a few years ago and a sensible outcome achieved. Supporters of franking credits should be careful not to re-start the battle by encouraging fancy financial engineering around franking credits to bring these into disrepute. If there is inappropriate payment of franking credits via some capital raising strategies then that does none of us any good. Mop up the occasional misdemeanours and leave the current support for franking credits as is.

Dimitri Amargianitakis
October 12, 2022

I feel is a back door for the Labour Government to implement the same law that saw them loosing the previous election. They may even think that 3 years is along time and the public will forget by the next election. I Think not My Pensioner clients and self funded retirees do not think so . They say Take my franking away and I will make sure that we boot them out at the next election.

October 12, 2022

If we were to ignore all costs (of paying a dividend and raising capital), then surely, in the interest of full transparency, the best solution for every company would be to pay out ALL of its profits in dividends as those profits are made, and then raise capital to finance any operations or expansion? This way, the shareholders each make their own decision as to whether the company is a good investment (by contributing to the capital raising). Companies deciding to retain profits (rather than pay them as dividends) are in effect making a decision on behalf of their shareholders (to invest in their company) By paying all profits as dividends, and then raising capital, the decision is made by the shareholder, and not by the company, and that surely is where such a decision should be made. This of course assumes that there are no costs associated with capital raising (which of course is incorrect). But for this argument, I am talking only in theory. Therefore, any proposal such as being proposed, must be theoretically wrong


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