Secrets and Lies: how franking credits stole the tax bonanza

Franking credits still causing incitement

Secrets and Lies: how franking credits stole the tax bonanza

Thanks to franking credits, the $52 billion in tax paid by Australia’s largest corporations is not actually received by the Tax Office. Michael West reports on one number everybody seems to have missed.

For five years now, the Tax Office has issued its Corporate Tax Transparency Report which shows how much tax Australia’s largest companies pay, or don’t pay. The latest report was released earlier this month. The data showed the biggest companies operating in this country paid collectively $52.3 billion in 2017-2018.

Surely this was good news. Then why was nobody crowing about it? Well, almost nobody.

Upon releasing its report, the ATO’s Deputy Commissioner Rebecca Saint did note the “significant increase of $6.6 billion in tax payable” by large corporations.

But where were the eulogies from government ministers and peak business groups? Why the deafening silence? No press release from the office of Treasurer Josh Frydenberg, or from Finance Minister Mathias Cormann for that matter.

Nothing from powerful peak body the Business Council of Australia either. Even though the Tax Office press release said the rise in tax revenue was “primarily due to strong commodity prices”, there were no proud words from the mining lobby, the Minerals Council of Australia.

Perhaps it was because a slew of the world’s largest corporations were still paying zero income tax in Australia. There was nothing from US oil giant Exxon, despite its $9 billion in revenue, nothing from Chevron either, or Rupert Murdoch’s News Australia Holdings again this year; nothing from a bunch of coal giants, still relentlessly chewing through tax losses from Australia’s overly generous tax regime.

Why the silence? Was it also because nobody wanted to draw attention to the fact that this rise in tax receipts was also roughly equivalent to the amount paid out in franking credits … that the real amount received by the Tax Office was probably $6 billion or so shy of the touted $52.3 billion which headlined the transparency figures?

This is tax money which does not go to pay for submarines, education, health or pensions.

Cont..............

 

Um, Mick always has had a bee in his bonnet. Doesn't actually say where the refunds of "excess" credits went nor is it seems from the snippet you posted @Redwing it's even mentioned. The way it is written he is inferring that a company pays tax and all that is payment is handed back right away.

He's a bright boy though but this seems slightly sloppy and knickers in a twist time. A bad Chrissy lunch perhaps?

 

Sssshhhh!!!

Don't tell anyone...it has ended up in my pockets......

 

Give it back!

Or at least buy a house in the Druitt.

 

What youse sayin'.....I swear.....did Druites a favor...I put in my pocket..instead of dem spending it on luxuries like Dom Druie...and Cash for Hash..

Besides.... I ain't supporting a Boganaire like youse.

 

Might be time to re-open this one @Simon Hampel

Labor ‘at it again’ in surprise move on dividends

The Albanese government has shocked investors by proposing to retrospectively stop companies paying shareholders fully franked dividends that are funded by capital raisings.

The crackdown on dividend imputation credits will affect retail investors and superannuation funds receiving special dividends outside of the usual dividend payment cycle and companies that issue new equity to fund distributions to shareholders.

Treasury forecasts the “franked distributions and capital raising” measure will raise a relatively modest $10 million a year, but investors fear the cost to them will be larger.

The government has proposed backdating the “integrity measure” to 2016 to ensure that only distributions equivalent to realised profits can be franked, alarming investors in companies that have paid special dividends or issued new shares in the past six years.

The change could disallow some franking credits paid to retail shareholders, superannuation funds and trusts that receive dividends from public and private companies.

BDO tax partner Mark Molesworth said investors could receive surprise tax bills for special dividends they received since December 2016.

 

Removing franking would only result in companies relying more on bonds, because interest is tax deductible. And you can argue that equity is more stable than debt.

 

Would be interesting to see this in practice. If a company has a DRP, then would this exclude them? Likely to be more holes that a sieve in this piece of legislation with all of the exceptions and exclusions that they are likely to require...

 

The draft Explanatory Materials is your friend.

https://treasury.gov.au/sites/default/files/2022-09/c2022-314358-em.pdf

 

A legal opinion form one source:

"A strict reading of the Exposure Draft may mean the measure captures distributions that are accompanied with dividend reinvestment plans.

By definition, dividend reinvestment plans involve the payment of dividends that are simultaneously reinvested by the shareholder, resulting in a capital raising by the company. As mentioned, the entire distribution ceases to be frankable even if the test is satisfied only in relation to some of the capital raised from an issue of equity interests or part of a franked distribution. Therefore, there is a risk such plans could result in distributions being unfrankable."

We shall simply have to wait and see. Once we know then appropriate action will need to be taken.

 

The subtle beauty of it is the Government gets to keep the Corporate tax.

 

Come to think of it, paying dividends from capital raisings is the exact same MO as a Ponzi scheme.

 

Someone in Treasury is getting a high-five from their work mates for being able to get the term mischief through the clearance processes:



In any case, I think reinvestment plans are safe. That's a very strict reading and 1.24 would seem to clear it up, noting courts use the ED to understand the legislation and its intent when making decisions. With that said, the overall definition of established practice appears to be more like, "its kinda of vibe thing" - but maybe the finance types get it.

 

Dividend reinvestment in my opinion is the mechanism where holder exchange cash for the shares at discount sometime. In return company retain the cash and dilute everyone by xx %. now purpose for the company to offer this is to utilise that cash for further investment in company (whatever they are doing LIC or company or ETF) and these cash strictly are not earning of the company in my opinion as they have not earned it so companies currently using dividend reinvestment cash to pay for dividend by attaching franking is doing wrong and if this legislation change is prohibiting it then it is a good legislation ... in my opinion.

shareholder may think that government is banning a franking but it is not true in my opinion, government only closing loop hole created by whichever government was in power in past (can we say JH or PC?)

 

Current ATO approach on DRPs. Makes sense as income is taxed not share issues.

"If you reinvest your dividend, for tax purposes you treat the transaction as though you had received the cash dividend and then used it to buy more shares."

Dividend reinvestment plans

For ETFs interesting, given they are tax throught entities and, to my knowledge, they cannot conduct capital raisings from unit holders.

On a vastly more important matter, the Sun will rise at 6:00am today. Time to fill the thermos, pack some food and drive with the headlights on high beam in order to see the kangaroo just before the collision.

 

@Isla_Nublar

For its last dividend, ARG issued an additional 2.7m shares under the DRP. This is 0.36% of total shares on issue. The dilution factor for those of the total 90,500 shareholders who did not participate in the DRP is likely to be immaterial. Maybe someone with greater ability than I would be prepared to calculate it assuming it is possible.

There is an upside of course as the LIC retained $24.8m which it is able to invest on behalf of all shareholders. Those who don't participate in DRP should be thankful to those who do for giving up dosh and providing the slight kick along of funds available for investment.

Haven't looked at other LICs as I cannot be bothered to do it.

As for ETFs whether you hold 1,000 units only or hold 1,000 units and got additional units under the DRP, I don't think it matters given the ETF follows the relevant index. I don't see how any ETF holder is diluted as a consequence of DRP but I could be missing something.

 

Agree your comment re an ETF, and I think that an LIC would largely be the same (in the sense that assets are marked to market [yes not quite, I get it] so the dilution effect should be minimal. Of course there will be times when its greater and times when its smaller - should all wash out in the end.