Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 306

Franking policy may increase corporate tax avoidance

The heated debate continues regarding Labor’s proposed removal of refundable franking credits. The primary focus is the impact of the change on retirees, SMSF trustees in pension phase and low-income earners. Attention has also been given to the policy’s potential impact on asset allocation, investment in Australian companies and even the value of shares of some Australian companies.

However, one potential consequence that has flown under the radar but would indirectly impact all Australians, is the possibility for a rise in corporate tax avoidance.

The extent of corporate tax avoidance in Australia

Accusations of tax avoidance have thrust many publicly-listed companies into the spotlight in recent years. In 2014, the Tax Justice Network and United Voice accused Australian listed companies of tax avoidance on an industrial scale claiming that the federal government is short-changed by $8.4 billion annually in corporate tax revenue. A more recent study in 2018 by the National Bureau of Economic Research in the US found that in 2015, multinationals shifted roughly $15.5 billion (US$12 billion) in profits out of Australia and into tax havens. This equates to approximately $4.7 billion in lost company tax revenue to the Australian Budget.

While exact numbers are elusive, it is clear the public perception in Australia is that many companies, and large multinationals in particular, do not pay their ‘fair share’ of tax. And there is no other time when public perception matters most than election time.

Regulatory response from the Australian government

Australian governments have implemented several initiatives in recent years designed to combat corporate tax avoidance including the diverted profits tax, multinational anti-avoidance law, and the adoption of many of the OECD’s base erosion and profit-shifting reforms e.g. country-by-country reporting. In 2018, the Australian Taxation Office (ATO) claimed its Tax Avoidance Taskforce had netted $5.6 billion in additional tax in the first two years including extra tax raised through the aforementioned initiatives.

However, despite these targeted initiatives, Australia’s current dividend imputation (including full franking credit refundability) also plays an important role in curtailing corporate tax avoidance.

Role of dividend imputation system in mitigating corporate tax avoidance

The introduction of full franking credit refundability from 1 July 2000 enhances shareholder’s after-tax returns and provides stronger incentives for firms to pay company tax (minimise tax avoidance) to generate valuable franking credits for distribution to shareholders.

Clearly, the change was especially attractive to resident taxpayers whose marginal tax rate is less than the statutory company tax rate of 30%, such as Australian superannuation funds in pension where earnings are tax-free, or accumulation phase, where earnings taxed at 15%. Superannuation funds are major investors in Australian listed companies and seek to maximise after-tax returns for members.

Indeed, in 2013 two UNSW academics, Gordon Mackenzie and Margaret McKerchar, interviewed Chief Investment Officers of 22 Australian superannuation funds and found that 71% claim to actively-manage franking credits as part of their overall investment strategy.

Academic research confirms impact of franking

Academic research shows that the dividend imputation and corporate tax avoidance in Australia are inextricably linked. In 2013, researchers at ANU investigated large publicly-listed Australian firms in the 1999-2003 period and found that firms distributing franked dividends adopt a more conservative tax strategy compared to firms that do not pay franked dividends. More recently, in 2018, researchers at UTS found that in the 2004-2015 period, firms paying partly-franked or fully-franked dividends are less likely to engage in tax avoidance compared to firms that pay unfranked dividends or firms that pay no dividends at all.

Recent research conducted at UNSW takes a different approach. We analysed the impact that the introduction of full franking credit refundability from 1 July 2000 had on the level of corporate tax avoidance in the years following the change, 2001 to 2004. Consistent with the results of the prior studies, we find that following the introduction of the new rule, Australian dividend-paying firms significantly reduce tax avoidance relative to foreign firms listed in Australia and Australian non dividend-paying firms. The findings are even more pronounced for firms paying fully-franked dividends.

The results of all three studies are consistent with the notion that firms undertake less tax avoidance in the post 1 July 2000 period given the presence of stronger incentives for them to pay corporate tax.

Unintended consequence?

Interestingly, there was no mention of the possible impact Labor’s policy may have on corporate tax avoidance in the recent Report on the inquiry into the implications of removing refundable credits by the House of Representatives Standing Committee on Economics delivered in April 2019. At a time when corporate tax avoidance is especially on-the-nose with the public, this policy change has the potential to exacerbate the problem.

It is surprising that the incumbent Government has made little attempt to communicate this to the electorate and explain that this policy may undermine some of the good work it has done in recent years to safeguard revenue and preserve tax system integrity.

Possible policy compromise?

This forgotten element of the system adds to the debate and highlights one of the broader benefits of the current rules that are not related to individual investor financial circumstances. However, it does provide new weight to arguments for a modification to Labor’s policy such as including a cap on franking credit refunds so that the policy intent is better achieved and to minimise the impact on low-income earners. Perhaps such a compromise would result in the best of both worlds.

 

Dr Rodney Brown is a Lecturer in Taxation and Business Law at the University of NSW Business School, including the Master of Tax and Financial Planning course. He completed his PhD at the London School of Economics after working as a financial planner in Sydney. This article is general information based on a current understanding of tax law and Labor’s proposal, and it does not consider the circumstances of any individual.

5 Comments
Greg
May 16, 2019

Thank you for such a thoughtful article. In the imputation debate it has been forgotten that companies are queuing up to pay tax so that they can frank dividends. This is one of the great successes of the imputation system. Without imputation companies will look to minimise tax wherever possible. What also does not get mentioned is that the ATO considers that the tax not collected from the small business segment is much greater than large corporations.

Jim
May 16, 2019

OK with your article in general Rodney, but why introduce another taxation variable, in a cap value for refundable credits?
Wouldn't it be simpler to just use the $1.6 million balance, which is already tracked in personal and taxation dept administration? That is, if a SMSF account is under the $1.6m at year end, then that account stays entitled to refund of all earned credits!

Graeme
May 17, 2019

And for those receiving excess franking credits outside of super? Would they have to fill in a whole new form every year detailing assets so as to get the same benefit? Not so simple after all.

GM
May 15, 2019

I can confirm that as Tax Manager at a major company, we actually brought an otherwise Aus. tax free transaction back on-shore specifically to pay tax for our Shareholders who ‘loved ‘ imputation credits.

Tom
May 15, 2019

Well as a tax manager at a major company, the shareholders of Australia applaude you. Keep up your diligent hard work.

 

Leave a Comment:

RELATED ARTICLES

A fair go in favour of Labor’s franking policy

Are franking credits worth pursuing?

Are franking credits hurting Australia’s economy?

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.